Oil rises on tight U.S. supplies

NEW YORK (Reuters) - Oil rose on Wednesday on concerns that refinery problems and hurricane activity in the Gulf of Mexico drained U.S. inventories.

U.S. crude settled up 65 cents at $75.73 a barrel, while London Brent crude rose 42 cents to $74.34 a barrel.

U.S. oil inventories were seen slipping 500,000 barrels in the week to August 31, after Hurricane Dean disrupted Mexican oil exports, according to a Reuters poll of analysts.

Ongoing refinery problems were expected to cause a 1.3 million barrel draw in gasoline stocks in Thursday's release of weekly U.S. government oil inventory data, the poll showed. <EIA/S>

"A tightening product supply outlook appears to be attracting a new wave of buying from speculative interests," John Kilduff, senior vice president at MF Global, wrote in a research note.

The aging U.S. refining system has strained to keep up with demand this summer, pushing down inventories as a string of unplanned outages kept markets on edge.

"An elevated number of refinery outages have continued to plague the market and with demand staying solid, inventories have fallen to critically low levels," said a Barclays Capital report.

"We expect gasoline prices to remain firm in the coming weeks, with some upside risk if inventory levels continue to move lower."

Some analysts expect oil supplies to struggle to keep up with demand growth later this year unless the Organization of the Petroleum Exporting Countries ramps up production.

But most OPEC members have said the group will likely stick with existing output levels when it meets on September 11. Only Indonesia, OPEC's second-smallest producer, has said it may propose an increase.

Most members of OPEC, which sets supply limits for 10 of its 12 members, contend an output boost would only add to what they call comfortable stock levels, one OPEC source said.

But the group may need to raise output by up to 1 million barrels per day (bpd) later this year, perhaps in December, should demand prove robust and stocks fall, the source added.

Prices this week have climbed towards the record high of $78.77 hit on August 1, as Hurricane Felix threatened the Gulf of Mexico. The storm weakened to a tropical storm after hitting the Caribbean coastline of Nicaragua and Honduras and is not expected to emerge over the southern Gulf of Mexico, the home of Mexico's major oilfields.

So far this year, the U.S. and Mexican oil sectors have escaped major storm damage, but Colorado State University forecast that the rest of the 2007 Atlantic hurricane season would be busy.

(Additional reporting by Peg Mackey in London and Annika Breidthardt in Singapore)