Oil dips after hitting seven-week highs on demand hopes, war jitters

By Deep Kaushik Vakil and Nia Williams

(Reuters) -Oil prices dipped on Wednesday after hitting seven-week highs as summer demand optimism and concerns over escalating conflicts offset an industry report that said U.S. crude inventories unexpectedly rose.

Brent crude futures slipped 6 cents, or 0.1%, to $85.27 a barrel by 1943 GMT, while U.S. West Texas Intermediate crude was down 10 cents, or 0.1%, at $81.47 per barrel.

Brent reached $85.84 a barrel earlier in the session, its highest since May 1, while WTI traded up to $81.96 a barrel, the highest level since April 30.

Trading activity was thin due to a U.S. federal holiday.

"The current snapshot presents an underwhelming picture but there are green shoots that indicate a more optimistic outlook," said Tamas Varga of oil broker PVM.

The Brent price being $8 over the lows hit in early June "shows genuine optimism that the global oil balance will eventually tighten," Varga added.

Both benchmarks, having recovered strongly in the last two weeks, gained more than $1 in the previous session after a Ukrainian drone strike led to an oil terminal fire at a major Russian port.

In the Middle East, Israeli Foreign Minister Israel Katz warned of a possible "all out war" with Lebanon's Hezbollah, even as the U.S. attempted to avoid a broader conflict between Israel and the Iran-backed group.

An escalating war risks supply disruption in the oil-producing region.

"The potential escalation of tensions in the Middle East is adding some supply risk to the oil demand equation," said Bart Melek, head of commodity strategy at TD Bank, adding recent U.S. economic data supported bets the Federal Reserve would move towards cutting interest rates in coming months.

China data this week showed May industrial output lagged expectations, but retail sales, a gauge of consumption, marked the quickest growth since February.

Meanwhile, U.S. crude stocks rose by 2.264 million barrels in the week ended June 14, market sources said on Tuesday, citing American Petroleum Institute figures. Analysts polled by Reuters had expected a 2.2-million barrel draw in crude stocks.

However, gasoline inventories fell by 1.077 million barrels, while distillates rose by 538,000 barrels, the sources said, speaking on condition of anonymity. [API/S]

Official stocks data from the U.S. Energy Information Administration is due on Thursday.

(Additional reporting by Laila Kearney in New York, Emily Chow in Singapore and Noah Browning in London; editing by Jason Neely, Elaine Hardcastle, Chris Reese and Rod Nickel)