Oil rises on weak dollar, but bloated supply still weighs

By Sabina Zawadzki

LONDON (Reuters) - Oil prices rose on Tuesday thanks to a weakened dollar, supply disruption in Libya and the latest comments from officials suggesting OPEC could extend its deal cutting global production.

But crude futures were weighed down by a resurgence in U.S. shale oil production and the expectation that inventories in the country would once again build, illustrating the persistent global supply overhang that has depressed prices for three years.

Prices for front-month Brent crude futures, the international benchmark for oil, had gained 48 cents from their last close to $51.23 per barrel by 0910 GMT.

In the United States, West Texas Intermediate (WTI) crude futures were up 48 cents at $48.21 a barrel.

Traders said Brent rebounded from testing a $50 a barrel support on Monday. Futures were supported by a weak dollar, which can attract investors to safer commodity markets while making oil cheaper for countries using other currencies.

The dollar was slightly stronger against a basket of other leading currencies on Tuesday but is still trading at levels not seen since last November.

Both Brent and WTI jumped over 20 cents a barrel after it emerged Libya's oil output has fallen by roughly a third, or 252,000 barrels per day (bpd) because armed factions blocked production at the Sharara and Wafa oil fields.

The contracts reacted positively after Iranian Oil Minister Bijan Zanganeh said the global oil cut agreement between the Organisation of Petroleum Exporting Countries (OPEC) and other major producers was likely to be extended.

"Crude oil challenged support again yesterday but once again found a bid, this time supported by the bounce in stocks," said Ole Hansen, Saxo Bank Head of Commodity Strategy.

"Supply remains in focus ahead of the (U.S. Energy Information Administration) EIA report where an increase of more than 322k barrels will see Cushing hit a record. As a result of rising production and inventories we are seeing WTI's discount to Brent widen to the highest since 2015."

Rising stocks at Cushing tend to depress the U.S. benchmark price, widening its discount to Brent, which in turn makes U.S. crude oil attractive to importers. That undermines any OPEC efforts to cut supplies.

A record amount of U.S. crude oil has found its way to Asia and other destinations this year and more is expected to be shipped out as traders take advantage of arbitrage opportunities by sending excess U.S. crude into regions where it can find buyers.

(Additional reporting by Henning Gloystein in Singapore; Editing by Keith Weir)