UPDATE 9-Oil prices rebound, settle higher on worries about tight supply

Adds API data on U.S. crude stockpiles, paragraph 12

By Nicole Jao

NEW YORK, Sept 26 (Reuters) – Oil prices settled nearly 1% higher on Tuesday, rebounding from a slump to a two-week low in early trading as expectations of tighter supply outweighed worries that an uncertain economic outlook would crimp demand.

Brent crude LCOc1 futures settled 67 cents higher, or 0.7%, at $93.96 a barrel. U.S. West Texas Intermediate crude CLc1 futures settled 71 cents higher, or 0.8%, at $90.39.

On Monday, Russia softened its gasoline and diesel export ban. Exports of products already accepted by Russian Railways and Transneft can to go ahead, while higher-sulphur gasoil and fuel used for bunkering will be exempt from the ban.

But the ban on exports of high-quality diesel and gasoline remains in place.

Oil supply remains tight as Russia and Saudi Arabia have extended production cuts to the end of the year. “Oil supply is expected to underwhelm demand in the foreseeable future and therefore any weakness, even if it is achingly startling, should not last,” said Tamas Varga, an analyst at oil broker PVM.

The world’s top central banks, the U.S. Federal Reserve and the European Central Bank, have in recent days reiterated their commitment to fight inflation, signalling tight monetary policy may persist longer than previously anticipated. Higher interest rates slow economic growth, which curbs oil demand.

“Refined products remain under pressure as fears of higher oil prices for a longer period of time combined with higher interest rates for a longer period of time may depress demand,” said Andy Lipow, president of Lipow Oil Associates LLC.

Limiting gains, the U.S. dollar hit a 10-month high on Tuesday, as higher bond yields attracted investors towards the greenback.

As the major currency used for oil pricing, a stronger dollar typically weighs on oil demand as it becomes more expensive for importers relative to their local currency.

Rating agency Moody’s said on Monday that a U.S. government shutdown would harm the country’s credit, a warning coming one month after Fitch downgraded the United States by one notch on the back of a debt ceiling crisis.

“The threat of U.S. government shutdown and its potential impact on the country’s credit rating can also be a factor in oil finding it increasingly challenging to provoke the magical $100/bbl target,” Varga added.

Industry data released after settlement showed U.S. crude oil stockpiles rose last week by about 1.6 million barrels, according to market sources citing American Petroleum Institute figures. Analysts had expected a drop of 300,000 barrels. API/S U.S. government data on crude stockpiles is due on Wednesday.

Investors’ concerns about tightening supplies in the Cushing, Oklahoma storage hub also boosted prices during the session, said Price Futures Group analyst Phil Flynn.

Crude stockpiles at Cushing are at their lowest in 14 months due to strong refining and export demand, prompting concerns about the quality of the remaining oil and the potential to fall below minimum operating levels.

(Reporting by Nicole Jao in New York; additional reporting by Robert Harvey in London, Katya Golubkova in Tokyo and Andrew Hayley in Beijing; Editing by Sonali Paul, Kim Coghill, Emelia Sithole-Matarise, Paul Simao, Timothy Gardner and David Gregorio)

((Nicole.Jao@thomsonreuters.com))