Oil rises on U.S. data; bets for stockpile drop

By Barani Krishnan

NEW YORK (Reuters) - Oil rallied on Tuesday, with U.S. crude settling up nearly 2 percent, after bullish economic data and bets for lower crude stockpiles in the United States, the world's largest oil consumer.

Short-covering ahead of Thursday's expiry of the key front-month contract in U.S. crude also helped the market advance from a 6-1/2 year low hit on Friday.

New York-traded U.S. crude settled up 75 cents, or 1.8 percent, at $42.62 a barrel. That put it at more than $1 above Friday's low of $41.35, which was the market's bottom since March 2009.

Brent , the London-traded global benchmark for crude, settled up 7 cents at $48.81, steadying from a three-day decline. Brent was initially down on Tuesday after stock markets in China, the second largest oil consumer, fell 6 percent.[MKTS/GLOB]

The rally in U.S. crude helped cut its discount to Brent to below $6 a barrel, from Friday's three-month high above $7.

U.S. crude was up from early in the session after housing starts in the United States hit a near eight-year high in July as builders ramped up construction of single-family homes, suggesting an economy firing on almost all cylinders.

Gains accelerated in the afternoon after an updated Reuters poll showed analysts expecting a drop of around

800,000 barrels in U.S. crude stockpiles last week, versus earlier bets for a decline of 600,000 barrels.

The poll came ahead of an industry report on stockpiles due at 4:30 p.m. EDT (1730 GMT) from the American Petroleum Institute (API). Official inventory data will be issued on Wednesday by the U.S. Energy Information Administration. [EIA/S]

"People were squaring off short positions ahead of the API report. The approaching expiry of the front-month contract in U.S. crude also caused this aggressive move to the upside," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow, New York.

Even so, many oil traders were positioning themselves to profit from a further drop in U.S. prices, buying "puts" - options to sell contracts once they have fallen to a particular level - at prices as low as $30 a barrel.

Money managers and hedge funds have also cut their net long positions in U.S. crude to 2010 lows and in Brent to December 2014 lows, data shows.

Both Brent and U.S. crude are down more than half in value from a year ago. They rallied earlier this year, but have fallen about a third below peaks hit in May.

(Additional reporting by Lisa Barrington in London, and Henning Gloystein and Jacob Gronholt-Pedersen in Singapore; Editing by Marguerita Choy, Paul Simao and Frances Kerry)