Oil prices settle up on supply shocks, prospect of US interest rate cuts

By Shariq Khan and Arunima Kumar

NEW YORK (Reuters) -Oil prices rose by a dollar a barrel on Tuesday as supply disruptions mounted and traders bet that demand will grow if the U.S. Federal Reserve lowers borrowing costs this week, as is widely expected.

Both contracts settled at their highest so far this month. U.S. crude futures rose $1.10, or 1.6%, to $71.41. Brent crude futures gained 95 cents, or 1.3%, to settle at $73.70 per barrel.

More than 12% of crude output from the U.S. Gulf of Mexico was offline after Hurricane Francine last week, lifting oil prices in four of the last five sessions, a rebound after Brent last Tuesday hit the lowest in nearly three years.

"Oil prices have been in recovery mode since Wednesday, perhaps on supply concerns after Hurricane Francine in the U.S. Gulf of Mexico, as well as expectations of lower U.S. crude stockpiles," said Charalampos Pissouros, senior investment analyst at brokerage XM.

U.S. crude oil stockpiles likely fell by about 500,000 barrels in the week ended Sept. 13, according to an extended Reuters poll of analyst estimates. The American Petroleum Association will publish its estimates after 4:30 p.m. ET, followed by the U.S. Energy Information Administration's official report on Wednesday at 10:30 a.m. ET. [EIA/S]

Prices drew support from supply disruption in Libya, where a rift between rival factions over control of the central bank has led to lower oil output and exports, Rystad analysts said on Tuesday.

Talks led by the United Nations to solve the crisis failed to reach an agreement this week.

Libyan crude exports rose three-fold last week to about 550,000 barrels per day, a Reuters review of Kpler shipping data showed. That was still half the OPEC producer's exports last month of over 1 million bpd, the data showed.

Investors also hoped the Fed's widely anticipated rate cut could revitalize demand in the top oil consuming nation.

Fed funds futures showed markets pricing in a 69% chance that the central bank will cut rates by 50 basis points.

A cut of that magnitude could soften the U.S. currency and boost oil and other dollar-denominated commodities, independent energy and shipping analyst Matias Togni wrote on Tuesday.

There are also signs of improving demand in China, Togni said, where a turbulent economy has heavily dented demand from the top oil importer so far this year. The country's imports are approaching this year's highest levels at over 11 million bpd this month, he added.

(Reporting by Shariq Khan, Arunima Kumar and Jeslyn Lerh; Editing by Jason Neely, Mark Potter and David Gregorio)