UPDATE 12-Oil rises 2.5 pct on Mideast tensions, US optimism

* Israel ready for Gaza invasion, but prefers diplomacy

* Efforts to broker Mideast truce intensify

* Rising hopes U.S. "fiscal cliff" can be averted

By Matthew Robinson

NEW YORK, Nov 19 (Reuters) - Oil rose 2.5 percent on Monday

to its highest price since mid-October, fueled by supply

concerns as violence in the Middle East escalated and as

investors grew more hopeful that a U.S. budget crisis will be

averted.

Traders focused on the growing Israeli-Palestinian conflict.

Israel bombed dozens of targets in the Gaza Strip on Monday and

said that while it was prepared to step up its offensive by

sending in troops, it preferred a diplomatic solution that would

end Palestinian rocket fire.

While previous Middle East wars have led to oil embargoes

and temporary disruptions to energy supplies, analysts say it is

unlikely the confrontation will spill out into a wider conflict

in the region, which supplies a third of the world's crude.

United Nations Secretary General Ban Ki-moon was due to

arrive in Cairo on Monday to support ceasefire efforts led by

Egypt, which borders both Israel and Gaza and whose

Islamist-rooted government has been hosting leaders of Hamas.

Israeli media said a delegation from Israel had also been to

Cairo for truce talks, although a spokesman for Netanyahu's

government declined comment on the matter.

"There's no oil being lost, obviously. But it's just the

follow-on effect. No one likes confrontation anywhere near the

Gulf region," said Rob Montefusco, oil broker at Sucden

Financial in London.

Brent futures traded up $2.75 to settle at $111.70.

The session high of $112.20, was the highest since Oct. 19.

As prices advanced, Brent broke through its 50-day moving

average $111.09 a barrel after dropping below that average on

Oct. 18. The international benchmark later ticked above the

200-day moving average of $111.88 briefly.

U.S. crude oil rose $2.36 to settle at $89.28 a

barrel, off highs of 89.80 a barrel.

U.S. crude trading volume was lighter than normal, about 15

percent below the 30-day average after the settlement. Brent

volumes were about 5 percent below that average.

Financial markets also found support from expectations that

U.S. politicians will avoid a budget crisis, helping support

economic recovery in the world's biggest oil consumer. Wall

Street stocks climbed more than 1.7 percent on the optimism.

"There is a little confidence that the chatter that came out

last week between the president and congressional leaders might

be working toward an agreement," said Gene McGillian, analyst,

Tradition Energy in Stamford, Connecticut, noting that U.S.

crude also found support after breaking through technical levels

at $87.50 a barrel, which it had been testing last week.

A Reuters poll of analysts ahead of weekly U.S. inventory

data showed crude oil stockpiles were expected to have risen by

900,000 barrels in the week to Nov. 16. Gasoline inventories

were seen rising by 1.3 million barrels, while distillate

stockpiles were forecast to have dropped by 1 million barrels.

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