Oil prices have risen by nearly $3 after an attack on an offshore facility in Nigeria reports of Israeli military exercises simulating an air raid on Iran.

Friday's gains were a reversal of a heavy fall in prices following China's unexpected decision to raise the retail price of petrol and diesel by up to 18 per cent.

US July crude rose $2.69 to settle at $134.62 a barrel, off highs of $136.80. London Brent was up $2.86 at $134.86.

The rebound left oil prices largely unchanged from the beginning of the week.

"The petroleum markets rebounded ... on worries that Israeli military exercises held in the first week of June might have been preparation for a strike against Iranian nuclear facilities," Tim Evans, an energy analyst for Citi Futures Perspective in New York, said.

Conflict concerns

Energy experts have expressed concerns that any conflict between Israel and Iran could lead to a shutdown of the Strait of Hormuz, the waterway separating Iran from the Arabian Peninsula, through which roughly 40 per cent of the world's traded oil is shipped.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois, said: "Whenever you get Israel and Iran within the same sentence, you have a price reaction."

In Nigeria, Royal Dutch Shell shut 220,000 barrels of daily production after armed men in speedboats attacked the Bonga offshore oil facility.

Shell said it was too soon to say how long output at the deepwater installation would be shut.

Forecasts the previous day had suggested that the move by China would hurt demand, but some analysts now say consumption could rise as the price increase will encourage healthier supply at the pumps.

"We do not think that a country where consumers are used to waiting 3 hours for automotive fuel in many cases will see significant negative demand elasticity from a simple 20 per cent price increase," James Neale, a Citi analyst, said.

Demand for oil in the growing economies of China, India and the Middle East has been cited as a factor behind crude's almost sevenfold surge from $20 six years ago to a record high of nearly $140 a barrel.

Production increase

The price rally also defied assurances from Saudi Arabia that it was raising its production after months of pressure from consumer nations calling for more supply.

Ali al-Naimi, Saudi Arabia's oil minister, confirmed on Friday that the kingdom will be pumping 9.7 million barrels per day of crude in July, an increase of 550,000 barrels since May.

The announcement came before Sunday's meeting of the world's major oil producers and consumers in Jeddah to discuss ways to deal with the soaring cost of oil.

Despite Saudi Arabia's move to increase production, some producers are expected to argue against increasing output.

Chakib Khelil, the president of the Organisation of Petroleum Exporting Countries (Opec), criticised consumer pressure for a production increase to take pressure off soaring prices.

"To ask the oil producers to increase their output is illogical and irrational," Khelil was quoted as saying by the Algerian news service APS.

Iran, another Opec nation, said that increasing output would not dampen skyrocketing oil prices

Agencies