UPDATE 9-Oil rises on Middle East conflict, Gulf of Mexico fire

* Israeli bombings, Palestinian rocket attacks continue

* Gulf of Mexico oil platform fire helps boost U.S. crude

* December U.S. oil futures expire

(Updates throughout)

NEW YORK, Nov 16 (Reuters) - Oil rose on Friday as a fire on

a Gulf of Mexico platform and the escalating conflict between

Israel and Palestinians stoked supply concerns.

News of the fire at a Black Elk platform in morning U.S.

activity helped crude extend early gains, although the Coast

Guard later said it had not been producing oil at the time of

the fire, which helped calm market jitters. Two workers were

missing and four others injured by the fire.

"Traders who had been long Brent/short WTI (U.S. crude) on

the Middle East fears reversed that when the platform fire news

broke," said Phil Flynn, analyst at Price Futures Group in

Chicago.

The market was already on edge after Iraq's envoy to the

Arab League said in Cairo it would invite Arab states to use oil

as a weapon to press for a halt to Israeli attacks on Gaza. He

later appeared to withdraw the remark, saying Baghdad would make

no particular proposal to a League meeting.

The conflict has gripped oil markets, which have been

looking for any signs it could impact Middle East supplies.

Israeli ministers were on Friday asked to endorse the call-up of

up to 75,000 reservists after Palestinian militants nearly hit

Jerusalem with a rocket for the first time in decades and fired

at Tel Aviv for a second day.

Trading was volatile with the U.S. December crude contract

expiring at the end of Friday's session, following the

Brent December contract's expiry the day before.

Expiring U.S. December crude traded up $1.22

to settle at $86.67 a barrel. The more heavily traded U.S.

January crude gained $1.05 to settle at $86.92 a

barrel. Front-month January Brent crude rose 94 cents to

settle at $108.95 a barrel.

Data from the U.S. Commodity Futures Trading Commission

(CFTC) showed that oil speculators increased their net long

positions by 16,312 positions in the week to Nov. 13.

FISCAL CLIFF HANGER

Congressional leaders emerged from a meeting with President

Barack Obama on Friday and said they would work to find common

ground on taxes and spending.

A deal would keep the economy away from the looming "fiscal

cliff" -- year-end automatic tax hikes and spending cuts, which

could result in another recession and also stifle oil demand.

A report on Friday showing Hurricane Sandy hit U.S.

industrial output in October followed other indications of the

storm affecting the economy, including a rise in initial jobless

last week and a slump in factory activity in the mid-Atlantic

region struck by Sandy.

(Additional reporting by Dmitry Zhdannikov, Simon Falush and

Peg Mackey in London and Manash Goswami in Singapore; editing by

Gary Crosse and David Gregorio)

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