Oil prices rose above $78 a barrel Monday as Iran's war games, aimed at protecting its nuclear plants, deepened tensions in the oil-rich region.
Prices were also boosted by a weakening dollar, as investors awaited economic data expected to show the U.S. economic recovery is struggling to gather pace.
By early afternoon in Europe, benchmark crude for December delivery was up 90 cents to $78.37 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 26 cents to settle at $77.20 on Friday.
Iran on Sunday began large-scale air defense war games aimed at protecting its nuclear facilities from attack as an air force commander boasted the country could deter any military strike by Israel, state television reported.
Analysts said the military exercises sharpened tensions in the Middle East, but they didn't expect supplies to be affected.
"Given the trading range we've been in, some investors are going to view $77 as a possible buying opportunity and the Iranian war games gives an excuse to buy," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.
Oil has traded between $76 and $82 for more than a month amid concerns a sluggish global economy may not justify the price surge from $32 in December.
"One day oil prices look poised to break through the $80 a barrel only the next day to fall back towards $75 a barrel. It's as if everybody knows things will get better but they can't bring themselves to believe it just yet," KBC Market Services said in a report.
Crude also rose on a weaker dollar as investors awaited economic data out of the United States that is expected to show a sluggish economic recovery, keeping crude demand low.
The releases will include housing data on Monday and revised GDP figures for the third quarter on Tuesday. Many analysts expect the initial estimate of a 3.5 percent annual growth rate to be lowered.
On Monday, the euro rose to $1.4980 in European morning trading, up from the $1.4857 late Friday in New York. The British pound rose to $1.6612 from $1.6481, while the dollar fell to 88.82 Japanese yen from 88.96 late Friday in New York.
Friday marks the start of the holiday shopping season with the day after Thanksgiving traditionally considered a key barometer of consumer spending.
In other Nymex trading, heating oil rose 2.59 cents to $2.15 a gallon. Gasoline for December delivery gained 1.90 cents to $2.00 a gallon. Natural gas for December delivery was up 5.6 cents to $4.48 per 1,000 cubic feet.
In London, Brent crude for January delivery rose $1.12 to $78.32 on the ICE Futures exchange.
Associated Press writer Alex Kennedy in Singapore contributed to this report.