Oil prices rose above $66 a barrel on Friday, supported by evidence of improving consumer sentiment and heightened tension around Iran's nuclear program.

U.S. crude futures rose by 56 cents to $66.45 a barrel by 11:44 a.m. EDT. In London, Brent crude gained 59 cents to $65.41 a barrel.

U.S. President Barack Obama and other Western leaders accused Iran on Friday of building a secret nuclear fuel plant and demanded Tehran immediately halt what he called a direct challenge to the international community.

However, analysts said that large amounts of spare oil production capacity generated by a steep fall in demand tempered the market's reaction to the news of tensions with Iran, OPEC's second biggest oil producer.

I think the risk of geopolitical supply shock is muted somewhat by OPEC spare capacity being higher and U.S. commercial inventories being at a high level. But, that being said, if you have a situation that affects the supply chain, all bets are off, said Rachel Ziemba, lead energy analyst at RGE Monitor in New York.

In late 2008, Iran threatened to block the Strait of Hormuz, the sea route through which about 40 percent of the world's globally traded oil passes, when tensions escalated in another dispute with the United States around the nuclear program.

Additional support for oil prices came from data showing that U.S. consumer sentiment rose in late September to the highest since January 2008, according to a Reuters/University of Michigan Survey of Consumers.

The gains in oil prices reversed earlier selling spurred by a fall in U.S. durable goods orders in the United States, which added to doubts about the health of the economy of the world's biggest energy user.

Oil prices have been trapped in a range of between $65 and $75 for about two months. A lack of significant developments in fundamentals of supply and demand, which have remained slack all year, has forced investors to seek direction from technical chart analysis, equities and foreign exchange markets.

In a research note published on Friday, Goldman Sachs said range-bound trading reflected the end of a recession and maintained its oil price forecasts, but raised its forecast for global oil demand.

Oil had fallen by about $6 in the past two trading sessions after government figures on Wednesday showed crude and fuel inventories in the United States, the world's top consumer, had risen again, suggesting oil demand was still weak.

(Reporting by Rebekah Kebede in New York, Ikuko Kurahone in London; Fayen Wong in Perth; Editing by Walter Bagley)

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