Oil rises above $74 on report of U.S. inventory drop, Iran sanctions

By Alex Lawler

LONDON (Reuters) - Oil hit a two-week high above $74 a barrel on Wednesday as an industry report showing a sharp drop in U.S. crude inventories and U.S. sanctions on OPEC producer Iran pointed to tighter supplies.

The American Petroleum Institute reported U.S. crude stocks fell last week by 5.2 million barrels, more than three times the decline analysts expected. The government's official figures are due at 1430 GMT. [EIA/S]

"The API inventory data published after the close of trading yesterday are lending buoyancy to prices," Commerzbank analyst Carsten Fritsch said.

"Thus the official inventory data this afternoon are also likely to show a more marked inventory reduction."

Brent crude, the international benchmark, rose $1.38 to $74.01 a barrel by 1319 GMT and reached $74.19, the highest since Aug. 8. U.S. crude gained $1.28 to $67.12.

Oil also found support from a weak dollar, which has slipped this week in response to U.S. President Donald Trump's comment that he was "not thrilled" by the Federal Reserve's interest rate increases.

A weaker dollar makes oil less expensive for buyers using other currencies.

The prospect of a drop in oil exports from Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries, in response to new U.S. sanctions was also supporting the market.

European oil companies have started to cut back on Iranian purchases, although Chinese buyers are shifting their cargoes to Iranian-owned vessels to keep supplies flowing.

"The Iran issue continues to occupy traders' minds," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

Ratcheting up tensions, Iran warned it would hit U.S. and Israeli targets if it were attacked by the United States after Trump's security adviser said Washington would exert maximum pressure on Tehran going beyond economic sanctions.

OPEC has started to boost supplies following a deal with Russia and other allies in June, although producers have been cautious so far. Saudi Arabia told OPEC it cut supply in July, rather than increasing output as expected.

Signs of tighter supply countered concern about slowing oil demand stemming partly from the trade dispute between the United States and China, the world's two largest economies.

U.S. and Chinese officials were set to resume talks on Wednesday, but Trump said he expected there will be no real progress.

(Additional reporting by Jane Chung; Editing by Dale Hudson and Susan Fenton)