WTI drops, but Brent jumps as Ukraine stokes new supply fears

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Brent crude oil reversed losses jumping back above $108 a barrel on Friday, as fighting in Ukraine and deteriorating relations between Russia and the United States ignited new fears of supply disruptions in the market.

A Russian security official was quoted as saying that up to 40 shells fired by Ukrainian forces fell on Friday on the Russian province of Rostov, near the border with eastern Ukraine where Kiev is fighting pro-Russian separatists. The latest round of headlines prompted a sudden rebounding rally in the oil market on both sides of the Atlantic, with Brent extending gains by over $1 and U.S. crude turning positive.

"The escalation of hostilities is stoking supply fears, as the energy card is waiting to be played by Russia and the West as a way to inflict economic harm on each other," said John Kilduff, a partner at Again Capital LLC in New York.

Brent crude for September delivery traded up 80 cents near $107 a barrel. U.S. crude for September delivery reversed much of its earlier losses, going flat near $102 a barrel.

Trader block: Energy and Oil

Prices began rising shortly after Reuters reported that EU sources said European Council leader Herman van Rompuy has written to EU leaders saying any restrictions the bloc agrees on Russian access to sensitive technology should only include the oil sector, and exclude gas. Some traders also cited speculation about additional U.S. sanctions, although there were no indication of any news reports on this.

Russian Foreign Ministry said on Friday that the United States was trying to influence international opinion through unfounded insinuations over the crisis in Ukraine.

Oil inventories in Cushing fell another 163,000 barrels over the four days to July 22, data from Genscape Inc showed on Thursday, deepening a slump that had already dragged stockpiles to their lowest in six years.

Drawdowns at Cushing - delivery point for West Texas Intermediate contracts - have dropped stocks there to near what traders consider to be minimum operating levels, fueling a sharp rise in prompt U.S. crude oil prices.

--By Reuters. For more information on commodities prices, please click here.