Updated from 2:44 p.m. EST

Oil prices jumped to a three-month high Tuesday on concerns about Iran's nuclear ambitions and reduced Nigerian production.

February crude surged $2.43 to $66.35 after spending much of January hovering between $63 and $64 a barrel. Oil last traded at $66.79 on Sept. 29.

The rally in crude prices spread to natural gas and heating oil despite warm weather, which typically drives down prices on those fuels. Natural gas, which is used to generate heat and electricity, picked up 38 cents to $9.17 million British thermal units. Heating oil gained 7 cents to $1.79 a gallon and unleaded gasoline added 9 cents to $1.82 a gallon.

Geopolitical tensions are spooking the markets, observers said, even as mild temperatures have boosted supplies and production in the Gulf of Mexico has slowly recovered after hurricanes Rita and Katrina.

"What this means for the oil market is that, at the very least, volatility will remain extraordinarily high," said John Kilduff, senior vice president of energy risk management at Fimat USA. "Not only because there will be conflicting geopolitical statements from day to day, but also because the market has become divorced from economic fundamentals."

On Monday, Russia and China joined the U.S. and Europe in asking the U.N. Security Council to step into the fray with Iran, which announced last week that it is restarting a nuclear research program after a two-year suspension. Iran says the research is limited to nuclear power. Western powers, fearing a more sinister motive, have requested an emergency board meeting of the International Atomic Energy Agency on Feb. 2-3.

Traders are worried economic sanctions, which the U.N. Security Council could impose, will drastically cut world oil supplies and drive up prices. Over the past two years, inventories have grown tight thanks to rising domestic demand and growing Asian economies.

Iran pumps 3.9 million barrels a day, roughly 13% of the total amount of crude that the Organization of the Petroleum Exporting Countries produces. Saudi Arabia, the largest producer in the 11-country group, would not be able to make up the difference because it only has up to 1.5 million barrels of daily spare capacity.

Attacks on oil supplies in Nigeria, the fifth-largest supplier of U.S. oil imports, were also roiling the energy markets. On Monday,

Royal Dutch Shell

(RDS-A)

said its Benisede oil platform was damaged in a rebel raid, leading to the curtailment of about 100,000 barrels of daily production.

"With oil supplies tight, various groups may see this as an extremely good time for making demands and holding oil production as ransom," said Peter Beutel, president of Cameron Hanover, an energy risk management company in New Canaan, Conn.

The attack is the latest in a wave of violence that has engulfed the Nigerian oil industry. Militants kidnapped four contractors from an offshore platform last week and attacked an oil pipeline and disrupted supplies in late December. Nigeria pumps 2.5 million barrels of oil per day and is the largest oil exporter in Africa.

Geopolitical concerns and an inflow of money have boosted oil prices nearly 7% since the start of the year. There was $80 billion invested in funds that track the commodity markets last year, a number that is expected to grow 38% this year, according to Barclays Capital.

Hedge funds and other speculators boosted their long positions, or bet that prices will rise, on crude for the week ended Jan. 10, according to the Commodity Futures Trading Commission, which oversees the commodity futures and options markets. There were a net 145,309 long positions in the market during that period, an increase of 13,467 over the previous week. The number of short positions held relatively steady at 146,031.

In stock news, investment bank UBS initiated shares of

ExxonMobil

(XOM) - Get Report

,

Chevron

(CVX) - Get Report

and

Marathon

(MRO) - Get Report

with neutral ratings Tuesday morning. UBS kicked off coverage of

ConocoPhillips

(COP) - Get Report

and

Amerada Hess

(AHC) - Get Report

, an oil and exploration company, each with a buy.

Shares of oil and gas companies rose as crude prices skyrocketed, with Amerada Hess and ConocoPhillips posting some of the largest daily percentage gains. Amerada Hess rose 2.2% to $145.38 and ConocoPhillips hit a four-week high, increasing 5.6% to $64.16.

Valero Energy

>

(VLO) - Get Report

, a refiner, posted a 3.3% gain to $60.18,

Schlumberger

,

(SLB) - Get Report

an oilfield services company, climbed 1.6% to $108.99, and

Halliburton

(HAL) - Get Report

inched up 0.8% to $70.07.

Western Refining

will become the second energy-related initial public offering this year when its stock debuts this week under ticker symbol WNR. The El Paso-refiner expects to raise $367 million from its offering and has set a range of $15 to $17 per share, according to SEC filings.

Refineries have reaped the benefits of soaring oil prices and Western's net income more than doubled for the first three quarters of 2005. The company plans to use the IPO money to increase production capacity and upgrade its refining complex to process more sour crude oil, which is more plentiful and cheaper.

Linn Energy

(LINE)

, a Pittsburgh natural-gas producer, was the first IPO of 2006 last week and raised $247 million in the deal. Fat earnings and high fuel prices have prompted many energy companies, like Linn and Western Refining, to launch IPOs over the past year.