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Updated from 2:39 p.m. EDT

Oil prices continued to climb Tuesday on growing concerns that oil-producing countries in the Middle East may get involved if the Israeli-Palestinian conflict escalates.

While the Israeli Cabinet voted to

extend the initial Monday deadline for Palestinian leader

Yasir Arafat

to stop the violence, and the Israeli government agreed to participate in a U.S.-sponsored summit meeting, the situation remains tense, with riots reported throughout the region.

Fears that the conflict will spill over into nearby Arab states were reinforced by

Saudi Arabia's Crown Prince Abdullah bin Abdel Aziz

, who indicated Monday that his country was prepared to intervene if Israel were to attack Syria and Lebanon in retaliation for the weekend kidnapping of three Israeli soldiers. Still, analysts say the likelihood remains slim that the world's largest oil exporter or any other members of the

Organization of Petroleum Exporting Countries

would get involved in broadening the conflict.

"There may be short-term volatility created by statements and anxieties, but it's not in anyone's long-term best interest to let this spin out of control," said Michael Godec, senior vice president and director of oil and gas at Virginia-based

ICF Consulting


Still, the possibility of such a scenario was enough to drive oil prices up almost $2 in as many days. Crude oil for November delivery finished up $1.32, or 4%, at $33.18 on the

New York Mercantile Exchange

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, after gaining $1 on Monday.

The market seemed to shrug off assurances by OPEC's president, Ali Rodriguez, that the organization is working to get crude oil prices back within their informal price band of $22 to $28 a barrel. OPEC raised its production ceiling to 26.2 million, a move that went into effect on Oct. 1, in an attempt to rein in runaway oil prices. But the

Energy Information Administration

, a division of the

Department of Energy

, estimates that the cartel had already been producing above that level, due mainly to production increases in Kuwait, the United Arab Emirates and Saudi Arabia.

Most OPEC members are now producing at or very near their capacity. Still, the EIA projects that the group could produce about 600,000 barrels of oil a day above the newly implemented production quota, with almost all of it coming from Saudi Arabia.

The production increase may not be enough to bring prices below $30 a barrel until next year though, since it takes about a month and a half to ship the oil to the U.S. Analysts say distribution problems may result in additional delays in bringing some of the oil to its final destination. Meanwhile, domestic inventories remain far below last year's and normal levels.


American Petroleum Institute

, an industry group, will release after the markets close on Tuesday its weekly report of data on inventory levels, which this week will be for the first full week of October. The EIA releases its figures Wednesday morning. Expectations vary widely among analysts, with some estimating that gasoline stocks decreased last week, while others expect an increase of 1 million to 2 million barrels. Crude oil inventory projections range from no change to a buildup of 2 million barrels last week. Production at refineries is expected to have declined a half percent to just below 94% of capacity. Distillate levels are expected to have increased slightly from a half million to 1.5 million barrels.

Phil Flynn, analyst with Chicago-based

Alaron Trading

, warned of a "dramatic rally" in heating oil in particular if there are any disappointments in the buildup of distillates, which include heating oil and diesel fuel. On Tuesday, the November contract for heating oil finished up 4.2 cents at 99.71 cents.

Fears of a winter fuel shortage already prompted the


administration last month to

order 30 million barrels of oil be released from the nation's

Strategic Petroleum Reserves

, but it is unclear how much of that will be turned into heating oil for the U.S. market this winter.

Dwindling stock and supply levels have prompted many analysts to project that oil prices will remain at or above $30 until early next year.

"We're still in for a little bit of a wild ride," said Godec of

ICF Consulting

, who predicts that oil prices will fall to the mid to high $20s a barrel next year.