Oil settles higher as pressure mounts in the Middle East

By Georgina McCartney

HOUSTON (Reuters) -Oil futures settled higher on Thursday as hostilities continued in the Red Sea with Iran-aligned Houthis stepping up attacks near Yemen, but a large build in U.S. crude inventories weighed on gains.

Brent crude futures settled higher, up 64 cents or 0.77% at $83.67 a barrel. U.S. West Texas Intermediate crude futures settled higher, up 70 cents or 0.9% at $78.61 a barrel.

Israel's Army Radio reported on Thursday that Prime Minister Benjamin Netanyahu's war cabinet has approved sending negotiators to Gaza for truce talks taking place in Paris as pressure mounts in the Middle East.

Meanwhile, Yemen's Iran-aligned Houthis will escalate their attacks on ships in the Red Sea and other waters and have introduced "submarine weapons," the group's leader said on Thursday, as it keeps up attacks on shipping to show support for Palestinians in the Gaza war.

"The Red Sea situation continues to ferment and it is starting to register more with the market that this is an issue that is not going away," John Kilduff, a partner at New York-based Again Capital said.

"Europe is bearing the brunt in terms of supply - but European supply problems become U.S. supply problems because that will put a call on US gasoline and diesel", he added.

On Thursday, the premium for front-month WTI crude futures to the second month was up to 75 cents per barrel. That spread has widened in recent sessions, and on Tuesday touched $1.95 per barrel ahead of the March contract's expiry.

Market players are likely pricing in a potential disruption to supply in the near future, with the front-month contract's premium over the second widening, which "indicates a tightening market," UBS analyst, Giovanni Staunovo said in a note.

Still, crude gains were capped on Thursday by a build in U.S. oil inventories due to refinery maintenance and outages.

U.S. crude inventories rose by 3.5 million barrels to 442.9 million barrels in the week ending Feb. 16, the U.S. Energy Information Administration said on Thursday, compared with analysts' expectations in a Reuters poll for a 3.9 million-barrel rise.

U.S. crude inventories have climbed amid outages at large refineries that have left utilization rates at the lowest level in two years, though the plants are soon to resume output.

Refinery utilization rates were unchanged last week, at 80.6%, according to EIA data on Thursday, compared with analysts' expectations of an uptick to 81.5%, according to a Reuters poll.

BP's 435,000 barrel-per-day (bpd) Whiting refinery in Indiana, the largest in the U.S. Midwest, will return to full production in March, according to people familiar with plant operations, after a power outage from Feb. 1.

TotalEnergies' 238,000-bpd refinery in Port Arthur, Texas, is also working to complete a restart, though it is still operating minimally following a weather-related power outage.

The outages have drawn down distillate inventories, which include diesel and heating oil. Those stockpiles were down by 4 million barrels in the week to 121.7 million barrels, versus expectations for a 1.7 million-barrel drop, the EIA data showed.

(Additional reporting by Colleen Howe and Jeslyn Lerh; editing by David Evans, Kirsten Donovan, Will Dunham and Alexandra Hudson)