Front-month contract rises above $78 a barrel as Tehran launches war games By Polya Lesova, MarketWatch FRANKFURT (MarketWatch) -- Crude-oil futures rose above $78 a barrel on Monday, as Iran started five days of large-scale war games, heightening global political tensions amid worries about potential disruptions of oil supplies. Crude for January delivery gained 98 cents, or 1.3%, to $78.45 a barrel in electronic trading on Globex. Earlier, the contract hit a high of $78.60 a barrel. On Sunday, Iran launched defensive warfare exercises aimed at defending its nuclear sites in case of attack, the BBC reported on its Web site. An Iranian official said that if his country is attacked by Israel, it will respond by launching a missile strike against Tel Aviv, according to the report. Western nations have been press Iran to give up its nuclear program, but leaders in Tehran have insisted the program is for peaceful purposes. "They are under pressure, the Iranian government, and they need to show some muscle now, and this is a way of doing it," said Thina Saltvedt, analyst at Nordea Bank. "Since Iran is the fourth-biggest oil exporter in the world, it is always a threat to oil production if something happens in the area," Saltvedt said. "This tension seems to support oil prices." A member of the Organization of the Petroleum Exporting Countries, Iran is the No. 4 exporter of crude oil after Saudi Arabia, Russia and Norway. Analysts at Commerzbank, however, cautioned that "concerns over supply disruptions are overdone," saying that OPEC members have spare daily production capacity currently amounting to slightly less than 6 million barrels. This exceeds Iran's oil output by more than 50%, they said. "Despite significant surpluses in physical commodity markets that are mirrored in rising inventories, commodity prices continue to rise," the Commerzbank analysts wrote in a note to clients. "Apparently, the absence of physical demand is being compensated for by investors." Also on Globex, December reformulated gasoline gained 2 cents, or 0.9%, to $2 a gallon and December heating oil added 3 cents, or 1.3%, to stand at $2 a gallon. Also filtering into the trading in energy, gold futures rallied to a fresh high of $1,167.80 an ounce, thus extending their winning streak into a seventh session. Read more on the rise in gold prices. And the dollar fell against its main rivals in foreign-exchange dealings, as currency traders keyed on remarks by James Bullard, president of the Federal Reserve Bank of St. Louis. The dollar index (DXY 75.07, -0.55, -0.73%) , which tracks the performance of the greenback against a basket of other major currencies, dropped 0.8% to 75.057. Bullard said Sunday that it's his view that the Federal Reserve should continue buying mortgage-backed securities and other assets longer than currently planned. He will have a vote on the central bank's committee that sets U.S. monetary policy next year. Read more on Bullard and mortgage-backed securities. The greenback's decline boosted demand for commodities denominated in dollars, including oil and gold. "The dollar is one very important factor," Saltvedt said. "We've seen a very close negative correlation between the dollar and oil prices. The weak dollar will support oil prices for a while going forward."

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