By Georgina McCartney
HOUSTON (Reuters) -Oil futures settled higher on Thursday on worries about global crude supply disruptions as geopolitical pressure in the Middle East and Europe mounted, while a surprise increase in U.S. crude and gasoline inventories gave prices a ceiling.
Brent crude oil futures settled up $1.14, or 1.34%, to $86.39 a barrel. U.S. West Texas Intermediate crude futures settled up by 84 cents, or 1.04%, at $81.74.
WTI futures also rose by more than $1 a barrel earlier in the session.
Cross-border strains between Israel and Lebanon's Hezbollah have been escalating, fanning fears that a widening war could draw in other countries including major oil producer Iran.
The French foreign ministry said France is extremely concerned about the situation in Lebanon and called for restraint.
Any contagion could have a big impact on crude supplies from the Middle East, said Panmure Gordon analyst Ashley Kelty.
Turkish President Tayyip Erdogan said his country stood in solidarity with Lebanon and called on the region's countries to show support.
Israel stormed a neighbourhood in Gaza City, telling Palestinians they must head south.
Israeli forces also bombed the southern city of Rafah in what it called final stages of an operation against Hamas militants.
Yemen's Houthis targeted "vessel Seajoy" in the Red Sea with a drone boat and a number of missiles and drones, the Iran-aligned group's military spokesman Yahya Saree said.
The Houthi militia, which controls the most populous parts of Yemen, has staged attacks on ships in the waters off the country for months in solidarity with Palestinians fighting Israel in Gaza.
In Europe, Russia is considering a possible downgrade of relations with the West due to deeper involvement of the U.S. and its allies in the Ukraine war, but no decision had yet been made, the Kremlin said.
Downgrading relations - or even breaking them off - would illustrate the gravity of the confrontation between Russia and the West over Ukraine following escalating tensions surrounding the war in recent months.
The U.S. Energy Information Administration (EIA) reported a 3.6 million-barrel weekly jump in crude oil stocks. Analysts polled by Reuters had expected a drawdown of 2.9 million barrels.
"Yesterday’s EIA report is still an overhang for the market today as it was a surprise in terms of the builds we saw, and the refinery run rates," said John Kilduff, partner at Again Capital.
U.S. gasoline stocks rose by 2.7 million barrels. Analysts had expected a 1 million-barrel draw.
"We are right now at the peak of the summer driving season, approaching July 4 weekend, so for markets to be moving sideways now, then we may well even see a dip after the holiday weekend,” said Tim Snyder, economist at Matador Economics.
In Europe, independently held gasoline stocks in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub rose by over 9% in the week to Thursday, data from Dutch consultancy Insights Global showed, suggesting limited scope for transatlantic U.S. gasoline demand.
Meanwhile, comments from Atlanta Fed President Raphael Bostic in a policy essay released on Thursday reiterated expectations of an interest rate cut in the fourth quarter of this year, in line with investors' expectations of cuts starting in September.
"There is certainly nothing we can hang our hats on in terms of the Fed looking to juice the markets again," Again Capital's Kilduff said.