Oil rebounds $2 on Iran missile tests

LONDON (Reuters) - Oil rose $2 to around $138 a barrel on Wednesday, partly recouping a $5 drop in the previous session, after Iran said it had test-fired missiles that could reach Israel and U.S. bases in the region.

U.S. light crude for August delivery was $1.81 up at $137.85 a barrel by 1:50 p.m., off highs of $138.28. London Brent crude was $2.11 up at $138.54.

Oil fell more than $5 on Tuesday on a firmer U.S. dollar and a rally in U.S. shares, which drew cash away from the commodities complex. U.S. crude had slid nearly $10 from last Thursday's record high of $145.85 a barrel.

Iran's missile tests at a time of increased tensions over its nuclear programme once again highlighted the geopolitical risks in the oil market.

"Of particular concern is the fact these missiles are not simply short to medium range," said Global Insight analyst Lawrence Poole.

Iran's state media reported the test-firing of nine long and medium-range missiles, including one Tehran has previously said could reach Israel and U.S. bases in the region.

Iran, the second-largest oil producer in the Organization of the Petroleum Exporting Countries, says its nuclear programme is for power generation, whereas the West fears it is aimed at making bombs.

Amid an escalating war of words with Israel, an aide to Iran's Supreme Leader was quoted on Tuesday as saying that Iran would hit Tel Aviv, U.S. shipping in the Gulf and American interests around the world if it was attacked.

Concerns about supplies resurfaced after Libya said its output would fall by about 100,000 barrels per day starting the next few days due to maintenance on a pipeline.