Oil prices increased on Monday, as tension ratcheted up between the West and Iran over its nuclear program and militants threatened further violence against oil workers in Nigeria.  U.S. crude oil futures climbed 24 cents or 0.4 percent to $67.63 and London Brent crude was up 16 cents or 0.2 percent at $67.45.

The U.S. government insisted on Sunday its priority was to seek a diplomatic solution to the nuclear dispute with Iran, but did not deny comments made by unnamed officials in a magazine report suggesting it had stepped up military planning.  "The market had become a bit too comfortable expecting a diplomatic solution in Iran," said Tobin Gorey, commodities strategist at the Commonwealth Bank of Australia in Sydney.  "Whether it ever comes to military action or not, it certainly shakes some complacency out of the market."

The Washington Post also reported the U.S. administration was studying options for strikes against Iran as part of a broader strategy of coercive diplomacy.  Iran accused the United States of waging a "psychological war" out of desperation.  It insists it only wants nuclear technology for power generation while Washington believes it is trying to build an atomic bomb and has refused to rule out military options to deal with what it says is one of the world's biggest threats.  Appeals from the United States, already bogged down fighting a bloody insurgency in Iraq, for sanctions on Iran have been frustrated by the reluctance of fellow U.N. Security Council veto-holders Russia and China to take such action.

Analysts said prices were also supported by uncertainty about the return of around 500,000 barrels per day of high quality Nigerian oil, shut since February by rebel attacks.  Royal Dutch Shell, operator of about 90 percent of the lost production, said on Friday it aimed to restart the smallest of its Nigerian fields soon, while Nigeria's petroleum minister said he hoped larger fields would return in about a month.  But Shell has refused to return staff to facilities until violence eases, while militants responded to Friday's comments with an email threatening to execute anyone found on previously attacked Shell platforms. "There's unlikely to be a quick return of output, and the market is certainly pricing in all of these various geo-political threats," said Gorey. 

Lost output and worries over further supply disruptions together with strong fund buying on commodities markets have helped boost prices by nearly 11 percent this year.