Further support came from remarks by Israel's transport minister that an attack on Iran's nuclear sites looked "unavoidable," the most explicit threat yet against Tehran from Prime Minister Ehud Olmert's government. (See more on oil prices in the video at left.)

Worries of a potential disruption of the OPEC member's crude supply have helped support prices over the past year.

"We've had a huge historic rally on little fundamental input, other than the weakness of the dollar and the news this morning out of Israel that seems to have pushed some geopolitical risk premium back in the market," Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

Morgan Stanley forecast the diversion of Middle East oil shipments away from the United States to Asian markets could push U.S. crude to a $150 a barrel by the U.S. July 4th holiday.

"Middle East oil exports are stable, but Asia is taking an unprecedented share," Morgan Stanley said in a report, adding U.S. inventories have dropped by 35 million barrels since March.

"Robust Asian non-OECD demand growth, coupled with a stagnant global oil supply backdrop appears to be pricing out Atlantic basin consumerers while at the same time driving Atlantic inventories to critically low levels." The report added to a string of upward price forecast revisions by analysts, with Goldman Sachs in May predicting prices could tip $200 a barrel within the next two years.

A six-year rally in oil has sent prices up six-fold as demand from emerging economies such as China and India strain supplies.

High prices have started to eat away at global growth however, with some consumers such as the United States and the United Kingdom showing signs of lowering consumption.

Some Asian governments -- including India -- have decided to cut fuel subsidies, stirring concern rising prices could cut further into demand.

The International Energy Agency (IEA), an adviser to 27 industrialised countries, said it may cut issues its latest its 2008 demand growth projection further after having already more than halved it to 1.03 million barrels per day (bpd).