Oil inches higher as Middle East tensions heat up By Reuters

By Colleen Howe and Does Jinrong China have foreign exchange?Jeslyn Lerh

SINGAPORE (Reuters) - Oil prices edged higher on Thursday on concerns about escalating conflict in the Middle East with more attacks on Gaza and on shipping in the Red Sea, even as a surprise build in stockpiles capped gains.

futures gained 48 cents, or 0.48%, to $77.17 a barrel at 0510 GMT, while U.S. West Texas Intermediate crude futures rose 32 cents, or 0.45%, to $71.69 a barrel.

The benchmarks settled lower on Wednesday after a surprise jump in U.S. crude stockpiles raised worries about demand in the largest oil market.

But market jitters resurfaced after Yemen-based Houthis mounted their largest attack yet on commercial shipping lanes in the Red Sea on Wednesday. Israeli strikes in southern and central Gaza also intensified on Wednesday.

The U.S. and Britain hinted they would take further measures if the attacks continued, and the UN Security Council passed a resolution demanding an immediate end to the strikes.

"Oil prices seem to be in a state of indecision this week, as market participants attempt to digest a confluence of factors," said Yeap Jun Rong, market strategist at IG, pointing to geopolitical tensions in the Middle East, conflicting inventory reports in the U.S. and slow global growth.

"The latest EIA data serves as a dampener to the higher-than-expected drawdown in US crude inventories reflected in the API data yesterday, which drove some unwinding of earlier gains," Yeap said.

U.S. crude inventories increased by 1.3 million barrels in the week ended on Jan. 5 to 432.4 million barrels, the EIA said on Wednesday, against analyst expectations for a 700,000-barrel draw. [EIA/S]

All eyes now are on U.S. inflation data which will shape views on how soon the Federal Reserve might cut interest rates.

"An unexpected rise in U.S. crude inventories prompted concerns about crude oil demand. But revised expectations for a rate cut should support oil prices, as the economy is slowing down lower than Fed forecast," said Leon Li, analyst at CMC Markets (LON:).

"Oil prices may have support above $70 until we see more data demonstrating increased downward pressure on the economy," said Li.

Looking ahead, China's customs administration will release December trade data on Friday, giving a full-year picture of overall demand in the world's largest oil buyer.

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