Oil settles higher as weak U.S. economic growth offset by supply concerns

By Arathy Somasekhar

HOUSTON (Reuters) -Oil prices settled higher on Thursday on worries of supply disruptions in Middle East supply as Israel stepped up airstrikes on Gaza's Rafah and on the U.S. Treasury secretary's comments that the economy was performing well.

Brent crude futures settled 99 cents, or 1.1%, higher at $89.01 a barrel. U.S. West Texas Intermediate crude futures was up 76 cents, or 09%, at $83.57.

Treasury Secretary Janet Yellen told Reuters U.S. economic growth was likely stronger than suggested by weaker-than-expected quarterly data.

Before Yellen's comments, oil prices had been pressured by data showing economic growth slowed more than expected in the first quarter. An acceleration in inflation suggested the Federal Reserve would not cut interest rates before September.

Yellen said U.S. GDP growth for the first quarter could be revised higher after more data is in hand and inflation will ease to more normal levels after a clutch of "peculiar" factors held the economy to its weakest showing in nearly two years.

"The U.S. economy continues to perform very, very well," Yellen said in the interview.

Feeding worries about fuel demand, U.S. gasoline stockpiles fell by less than forecast and distillate stockpiles rose against expectations of a decline in the week to April 19, according to Energy Information Administration (EIA) data on Wednesday.

U.S. crude inventories unexpectedly fell sharply last week, the EIA report also showed, as exports jumped.

The concern about U.S. fuel demand arises amid signs of cooling U.S. business activity in April and as stronger-than-expected inflation and employment data means the Fed is seen as more likely to delay expected interest rate cuts.

"The market started to realize that if you put the whole report into perspective, the slowing growth numbers were probably overstated," said Phil Flynn analyst at Price Futures Group.

"I think then the market has also started to focus on the tight supply situation and the geopolitical risk factors," Flynn added.

Israel stepped up airstrikes on Rafah overnight after saying it would evacuate civilians from the southern Gazan city and launch an all-out assault despite allies' warnings this could cause mass casualties.

Still, oil supply has not been affected as yet.

"Traders continue to waver on how much geopolitical risk to price in after Israel and Iran backed away from further direct confrontation last week, said Tim Evans, an independent energy analyst, cautioning that some residual risk remains as Israel ramps up operations against Hezbollah in southern Lebanon and Hamas in Gaza.

(Additional reporting by Arathy Somasekhar in Houston, Robert Harvey and Alex Lawler in London, Deep Vakil in Bengaluru, Yuka Obayashi in Tokyo and Jeslyn Lerh in Singapore; editing by David Goodman, Kirsten Donovan, Marguerita Choy and David Gregorio)