UPDATE 8-Oil firms on Ukraine worry; August WTI spikes before expiry

* Iran nuclear talks extended, pressure for deal intensifies

U.S. accuses Russia of complicity in shooting down flight MH17

* New European sanctions on Russia may heighten oil risk premium

(Updates prices to settlement)

By Lorenzo Ligato

NEW YORK, July 21 (Reuters) - Oil prices rose on Monday as the threat of escalating tension between Russia and the West mounted, while August U.S. crude zoomed higher prior to its expiry.

Oil initially eased after news at the weekend that six world big powers had extended nuclear negotiations with Iran for four months and eased sanctions on the Islamic republic, opening up the possibility of higher Iranian oil sales.

But the bias turned bullish later as Obama piled pressure on Russian President Vladimir Putin to compel pro-Moscow separatists to cooperate with investigations into the downing of the Malaysia Airlines last week.

"We're pricing in more geopolitical risk because of the fear of escalating violence in Ukraine," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

September Brent gained 44 cents to settle at $107.68 a barrel.

Prompt U.S. oil for August delivery surged by $1.46 to settle at $104.59 a barrel, as traders raced to cover positions ahead of Tuesday's expiration. September WTI rose a more modest 91 cents to settle at $102.86 a barrel.

Amidst protracted geopolitical uncertainty, expectations for large draws in U.S. oil stockpiles at Cushing, Oklahoma, the delivery point for the U.S. crude contract, also fuelled gains.

"Expectations that U.S. crude oil inventories will continue falling on strong refinery runs remains a more confident motivation for WTI buyers than the geopolitical threats to Brent-related supply," said Tim Evans, Energy Futures Specialist at Citi Futures in New York.


Investors remained on edge over the crisis between Moscow and the West after the downing of a civilian airliner in Ukraine last week. Increasing pressure from Europe could lead to further sanctions against Russia, raising the specter of supply disruptions from one of the world's top oil producers.

Meanwhile, Libya also remained in focus after heavy fighting between militias erupted around Tripoli airport on Sunday.

Despite a slight reduction in output at the El Feel oilfield, Libya's output reached around 555,000 barrels per day last week.

"The risk premium is starting to rebound back into U.S. crude," said Richard Hastings, macro strategist at Global Hunter Securities in Charlotte, North Carolina.

(Editing by Jason Neely, David Evans, Nick Zieminski and Diane Craft)