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UPDATE 4-Oil rises as market awaits U.S. Fed rate cut

Bozorgmehr Sharafedin

* Federal Reserve expected to cut interest rates

* Libya's Sharara oilfield shut

* U.S.-China trade talks in Shanghai; expectations low (Adds end of backwardation)

LONDON, July 31 (Reuters) - Oil prices rose for a fifth day on Wednesday, supported by a drop in U.S. inventories and investor expectations that the U.S. Federal Reserve will lower borrowing costs for the first time since the financial crisis more than a decade ago.

Brent crude futures, the international benchmark for oil prices, were up 42 cents, or 0.6%, at $65.14 a barrel by 1105 GMT.

U.S. West Texas Intermediate crude gained 40 cents, or 0.7%, to $58.45 a barrel.

For the month, however, both contracts were set to decline due to worries about oil demand, with Brent down 2.1% and WTI 0.03% lower.

Central bankers in the United States began their two-day meeting on Tuesday and were expected to reduce interest rates, with President Donald Trump having reiterated his call for the Fed to make a large cut.

"The move has long been anticipated and represents a double boon for oil prices on one hand it should encourage U.S. oil demand and on the other it will apply downward pressure on the dollar," PVM Oil Associates analyst Stephen Brennock said.

Oil stockpiles fell again last week, along with gasoline and distillate inventories, data from the American Petroleum Institute showed on Tuesday.

Crude inventories fell by 6 million barrels to 443 million barrels in the week ended July 26, against a forecast for a drop of 2.6 million barrels in a Reuters poll of analysts.

"The outlook for another draw in U.S. crude inventories and renewed outages in Libya are supporting oil prices," UBS oil analyst Giovanni Staunovo said.

Libya's Sharara oilfield, the country's largest, shut on Tuesday after a problem with a valve on the pipeline linking it to the Zawiya oil terminal.

Backwardation in Brent <LCOc1-LCOc2> has to a large extent evaporated, signalling a well-supplied market despite OPEC-led production cuts and U.S. sanctions on the energy sectors of Iran and Venezuela.

Backwardation is a market structure in which prompt prices are higher than forward prices.

Tensions in the Middle East remain high, providing another bullish catalyst for prices, with the United States formally asking Germany to join France and Britain to help secure the Strait of Hormuz after the seizure of a British tanker by Iran.

Market participants are also closely watching the U.S.-China meeting in Shanghai as both countries seek to end a year-long trade war, though expectations for progress are low.

China's factory activity shrank for a third month in July, underlining the strains placed by the trade war on the world's second-biggest economy and one of the top oil consumers.

(Additional reporting by Aaron Sheldrick, Yuka Obayashi and Yuri Harada in Tokyo Editing by Dale Hudson and David Goodman)