Oil edges up on Middle East tensions, but soaring U.S. output still weighs

By Amanda Cooper

LONDON (Reuters) - Oil rose for a second day on Wednesday, heading for its highest in six weeks after a surprise decline in U.S. inventories and as concern persisted over possible disruption to Middle East supply.

Unexpectedly large inventory declines in the United States helped underpin the market, even though refinery maintenance reaches a peak this month, but with the hardening stance of the United States towards Iran, most investors were reluctant to sell oil aggressively.

Brent crude futures were up 40 cents on the day at $67.85 a barrel by 1012 GMT. The price has risen by nearly 10 percent since hitting a two-month low of $61.77 in early February.

U.S. West Texas Intermediate (WTI) crude futures were up 36 cents at $63.90 a barrel.

Saudi Arabia's Crown Prince Mohammed bin Salman on Tuesday arrived in Washington for a state visit, raising speculation the United States could reimpose sanctions on Iran, following renewed criticism of the 2015 nuclear deal.

"You still have geopolitical considerations and possible U.S. action on Iranian sanctions ... that is going to be relatively prompt, in May," Petromatrix strategist Olivier Jakob said.

"So even though you do see signs that the market is lax on the physical side, do you go aggressively bearish when you have the potential for something happening between the U.S. and Iran?"

Analysts also pointed to the nomination of Mike Pompeo as new U.S. Secretary of State as a risk to oil markets, given he fiercely opposed the Iranian nuclear deal as a member of Congress.

"The nomination of Mike Pompeo for U.S. Secretary of State ... raises the likelihood of oil trade disruptions," Citi said in a note.

Should the United States reimpose sanctions against Iran, energy consultancy FGE said that would likely result in a 250,000 to 500,000 barrels per day (bpd) drop in its exports by year-end.

U.S. crude stocks fell by 2.7 million barrels in the week ended March 16 to 425.3 million, the American Petroleum Institute said on Tuesday, against expectations for an increase of 2.6 million barrels. [API/S] [EIA/s]

Official U.S. production and inventory data will be released by the Energy Information Administration (EIA) later on Wednesday.

Norbert Ruecker, head of macro and commodity research at Swiss bank Julius Baer said seasonally low demand at the end of the northern hemisphere winter meant he had "a rather cautious near-term outlook on commodities."

Investors have been particularly wary of the steep rise in U.S. output, which has grown by more than 20 percent since mid-2016, to 10.38 million bpd, putting the United States on track to become the world's largest oil producer this year.

(Additional reporting by Henning Gloystein in SINGAPORE; Editing by Robin Pomeroy)