June 20 (Bloomberg) -- Crude oil rose as the weaker dollar enhanced the appeal of commodities as a currency hedge and the New York Times reported that Israel held a rehearsal for a potential bombing attack on nuclear targets in Iran.

Oil prices have nearly doubled in the past year as investors sought refuge from a declining dollar, which fell again today after traders pared bets the Federal Reserve will raise rates on June 25. Iran, OPEC's second-biggest oil producer, would respond to an Israeli attack with a ``heavy blow,'' a senior cleric said.

``The only way to increase the value of the dollar is by increasing interest rates, which doesn't look likely at the meeting on the 25th,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``The simulated attack of Iran by Israeli warplanes is certainly not going to reduce geopolitical tensions.''

Crude oil for July delivery rose $2.69, or 2 percent, to settle at $134.62 a barrel at 2:48 p.m. on the New York Mercantile Exchange. Prices declined 24 cents this week. Futures climbed to a record $139.89 on June 16.

The July contract expired today. The August contract increased $2.76, or 2.1 percent, to settle at $135.36 a barrel.

Oil extended gains after Royal Dutch Shell Plc suspended export obligations for its Bonga crude oil after a militant attack halted production at the offshore field yesterday. Shell shut Bonga after the attack on a production vessel at the field, 120 kilometers (75 miles) off the coast of Nigeria.

Force Majeure

Shell, Europe's biggest oil company, declared force majeure on exports of Bonga crude for the remainder of June and July, company spokesman Rainer Winzenried said today in a phone interview from The Hague. Force majeure is a legal clause which allows producers to miss contracted deliveries because of circumstances beyond their control.

``The attack at Bonga was a big surprise because we thought the new deepwater fields wouldn't be vulnerable to attack,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``Now we have to worry that the rebels can take speedboats and attack these fields far offshore and not just facilities in the Niger Delta.''

Attacks previously focused on onshore and shallow fields in the creeks of the Niger Delta.

Workers at Chevron Corp.'s Nigerian unit plan to strike on June 23 after talks with management failed to resolve a labor dispute, a union official said. Chevron produced about 350,000 barrels of oil a day in Nigeria in 2007, according to a statement on the company's Web site.

Brent

Brent crude oil for August settlement rose $2.86, or 2.2 percent, to settle at $134.86 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.

The dollar is heading for its biggest weekly drop against the euro in more than two months. The U.S. currency fell 0.7 percent to $1.5613 per euro at 3:05 p.m. in New York, from $1.5504 yesterday.

An Israeli military exercise involving more than 100 F-16 and F-15 fighters seems to have been a rehearsal for a bombing attack on Iran's nuclear facilities and long-range conventional missiles, the New York Times reported, citing several unidentified U.S. officials.

``If enemies, especially Israelis and their U.S. supporters, wish to speak in the language of force, they should rest assured they will be dealt a heavy blow on the face by the Iranian nation,'' said Ayatollah Ahmad Khatami, leading Friday prayers in Tehran, according to the state-run Islamic Republic News Agency.

Auto Sales

The U.S. auto industry has been hurt by record gasoline prices, which have encouraged consumers to look for vehicles that get better mileage. General Motors Corp., Ford Motor Co. and Chrysler LLC credit ratings may be lowered by Standard & Poor's on concern that higher gas prices are inflicting ``financial damage'' on the industry.

Prices fell the most since March 31 yesterday after China unexpectedly raised fuel prices by at least 17 percent. The move will reduce the country's demand growth by 1.5 percent, according to Merrill Lynch & Co.

The decision may actually bolster demand for crude oil as refiners ramp up output to take advantage of higher processing profits, Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. said in reports.

``The Chinese reduction in subsidies was definitely a surprise, so the reaction made sense,'' Barakat said. ``This doesn't necessarily mean that Chinese demand will suffer. Refiners have not been willing to run at capacity because they are losing money, which might change.''

Jeddah Meeting

Saudi Arabia, the world's largest exporter, is gathering producers, oil companies and consuming governments in Jeddah this weekend to discuss surging prices. The kingdom may announce output increases of between 200,000 and 500,000 barrels a day, according to OPEC and media reports.

``There are two bearish factors, weak physical demand and the Saudis are going to add supply,'' Mueller said. ``On the other hand there is the financial flow into the market.'' When the financial community ``saw prices fall below $132 it was a great opportunity to buy.''

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: June 20, 2008 15:23 EDT