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UPDATE 5-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 Reuters poll)

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 60 cents, or 0.9%, at $65.32 a barrel by 1320 GMT.

U.S. West Texas Intermediate crude gained 59 cents, or 1%, to $58.64 a barrel.

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.

The American Petroleum Institute on Tuesday showed 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, signaling 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.

Market participants are also monitoring events in Shanghai, where U.S.-China trade talks are taking place in an effort to end a year-long trade war, though expectations for progress are low.

A Reuters monthly poll showed oil prices are expected to be range-bound near current levels this year as slowing economic growth and a protracted trade dispute curb demand.

Tensions in the Middle East remain high after recent attacks on oil tankers and the seizure of a British-flagged tanker by Iran.

However, Germany's Vice Chancellor and Finance Minister Olaf Scholz said he was very skeptical about a request by the United States to join a military mission to the Strait of Hormuz, a vital gateway for energy exports.

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