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SINGAPORE (Reuters) — Oil prices extended gains on Monday on fears a major spillover in fighting from the Gaza conflict into the Middle East could disrupt regional oil supplies, while approaching U.S. interest rate cuts lifted the global economic and fuel demand outlook.

Brent ( BZ=F ) crude futures climbed 63 cents, or 0.81%, to $78.78 a barrel, while US crude ( CL=F ) futures were at $75.50 a barrel, up 67 cents, or 0.88%.

In one of the biggest clashes in more than 10 months of border warfare, Hezbollah fired hundreds of rockets and drones into Israel on Sunday, as Israel's military said it struck Lebanon with around 100 jets to thwart a larger attack.

The clash raises fears the Gaza conflict risks morphing into a regional conflagration that would draw in Hezbollah's backer Iran and Israel's main ally the United States.

"Geopolitical risk factors will likely influence the oil market significantly," said Kelvin Wong, a senior market analyst at OANDA in Singapore.

"Increased odds of a tit-for-tat retaliation attack by Hezbollah and Iran in response to Israel's pre-emptive strike on Hezbollah sites in Southern Lebanon may keep WTI crude supported."

Both oil benchmarks gained more than 2% on Friday after U.S. Federal Reserve Chair Jerome Powell endorsed the start of interest rate cuts.

"The prospect of easing monetary policy boosted sentiment across the commodity complex," ANZ analysts said in a note, adding it expects the Fed will implement a progressive series of rate cuts.

Still, oil prices were down last week as a poor outlook for major economies weighed on fuel demand, the bank said.

Oil traders also remain cautious over the actions of the Organization of Petroleum Exporting Countries (OPEC) and its allies, or OPEC+, which has plans to raise output later this year, said Priyanka Sachdeva, senior market analyst at Phillip Nova.

"The cartel had recently trimmed its outlook for global oil demand, citing concerns over weak demand in top oil importer China," Sachdeva said.

"Current robust U.S. demand and refilling of SPR reserve look as the only support for oil prices against the risk of excess OPEC supply," she said, referring to the U.S. Strategic Petroleum Reserve (SPR).

The U.S. Energy Department said on Friday it bought nearly 2.5 million barrels of oil to help replenish the SPR.

The number of operating U.S. oil rigs was unchanged at 483 last week, Baker Hughes said in its weekly report.