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 US 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 (US 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 US December crude contract expiring at the end of Friday's session, following the Brent December contract's expiry the day before.

Expiring US December crude traded up $US1.22 to settle at $US86.67 a barrel. The more heavily traded US January crude gained $US1.05 to settle at $US86.92 a barrel. Front-month January Brent crude rose 94 cents to settle at $US108.95 a barrel.

Data from the US Commodity Futures Trading Commission (CFTC) showed that oil speculators increased their net long positions by 16,312 positions in the week to November 13.

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 US 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.

Reuters