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UPDATE 3-Oil prices rise on drop in U.S. crude stocks, refinery outage

Julia Payne

* Brent, WTI hit highest levels since end-May

* Philadelphia refinery could shut down permanently

* U.S.-Iran tensions underpin prices

* API data shows U.S. crude stocks down 7.5 mln barrels

* Upcoming: U.S. EIA data at 1430 GMT (Updates prices, adds context)

LONDON, June 26 (Reuters) - Oil prices rose on Wednesday, buoyed by an outage at a major refinery on the U.S. East Coast and industry data that showed U.S. crude stockpiles fell more than expected.

Front-month Brent crude futures, the international benchmark, were up 84 cents at $65.89 per barrel by 0948 GMT. They earlier touched their highest since May 31 at $66.25 a barrel.

U.S. West Texas Intermediate (WTI) crude futures were at $58.91 per barrel, up $1.08 from their last settlement. WTI earlier hit its highest level since May 30 at $59.13 a barrel.

Philadelphia Energy Solutions is expected to seek to permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex, two sources familiar with the plans said on Tuesday.

The plant, located in the busiest and most densely populated part of the U.S. east coast, had already declared force majeure on some gasoline supplies following the fire. U.S. gasoline futures hit their highest level since end-May on Wednesday.

"Oil is up in reaction to the API data combined with the refinery disruption on the U.S. East Coast. Gasoline is up and leading the complex and helping to keep momentum up on crude," Olivier Jakob of Petromatrix consultancy in Switzerland said.

"Refinery margins are improving globally because if that refinery can't operate then you'll have to compensate with higher runs elsewhere."

U.S. crude stockpiles fell by 7.5 million barrels in the week ended June 21 to 474.5 million, compared with analyst expectations for a decline of 2.5 million barrels, American Petroleum Institute data showed.

Crude stocks at U.S. delivery hub Cushing, Oklahoma, fell by 1.3 million barrels.

The crude inventory fall and refinery outage added to uncertainty over oil supplies created by the war of words between Washington and Tehran. This has prompted fears that oil shipments through the Strait of Hormuz - the world's busiest oil supply route - could be disrupted.

U.S. President Donald Trump threatened on Tuesday to obliterate parts of Iran if it attacked "anything American." Tehran has condemned a fresh round of U.S. sanctions as "mentally retarded."

Bilateral tensions spiked anew after Iran shot down a U.S. drone last week in the Gulf. Relations have been tense since Washington blamed attacks on oil tankers just outside the Gulf in May and June on Iran, while Tehran has denied any role.

In the search for longer term direction, markets will watch the G20 meeting this weekend followed by a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers taking place on July 1-2.

Non-OPEC producer Russia, backed by Saudi Arabia, pushed for the meeting to be delayed to see the outcome of the G20 talks. OPEC and non-OPEC producers are due to discuss extending output cuts for the second half of this year.

Energy demand projections and the global economic outlook have been weighed down by a trade war between the United States and China. U.S. President Donald Trump and Chinese President Xi Jinping will meet at the weekend for the first time in seven months. (Additional reporting by Colin Packham in Sydney, Editing by Joseph Radford/ Tom Hogue/Deepa Babington/Jane Merriman)