Oil firm above $121 on Russia tensions, dollar dive

US light crude for October delivery rose 37 cents to $121.55 a barrel by 0757 GMT, after surging nearly 5 percent on Thursday as part of a broader commodities rally.

London Brent crude rose 46 cents to $120.62.

Russia, the world's second-largest oil exporter, said on Thursday it would respond with more than just a diplomatic protest to a US deal with Poland to station parts of a US missile defense shield on Polish soil.

The dollar limped up on Friday after suffering its biggest one-day drop in five months on Thursday when some traders seemed to reinstate their long-commodities/short-dollar positions on mounting gloom about the US financial sector, pulling the dollar off an eight-month high touched earlier in the month.

‘Oil prices are influenced by the US dollar's retreat and diplomatic tensions between the US and Russia,’ said David Moore, commodity strategist from the Commonwealth Bank of Australia.

Prices have rebounded more than $9 from last Friday's four-month low, ending a dramatic slide of more than $35 from the record high of $147.27 a barrel hit on July 11 that was triggered by worries about slowing global demand.

While China's implied oil demand raced ahead at its fastest pace in two years in July, a sharp halt in diesel imports after the Olympics and signs of deteriorating consumption from Japan to the United States to Europe have undermined prices.

But attention has shifted in recent weeks away from fundamentals toward geopolitical risks. Russia's conflict with Georgia has already disrupted the transit of Azeri oil through the region, and traders fear the situation could worsen.

The While House demanded on Thursday that Russia must withdraw its military forces from Georgia ‘now,’ saying Moscow was in violation of a commitment to do so made earlier this month.

Russia has shown no signs of a full-scale withdrawal of forces from Georgia and has reportedly informed NATO it wants to cease military ties, US officials said.

Dealers are also beginning to weigh up possible Organization of the Petroleum Exporting Countries policy at its meeting on Sept. 9, and tracking Tropical Storm Fay, which might re-enter the Gulf of Mexico over the weekend.