* U.S. crude stockpiles expected to fall 2.8 million barrels on week
* Fighting in Ukraine, Gaza adds to oil risk premium
* Coming up: U.S. API data due at 2030 GMT
By Jacob Gronholt-Pedersen
SINGAPORE, July 22 Brent crude held steady above $107 a barrel on Tuesday, with worries over escalating geopolitical tension balanced by expectations of large draws in U.S. oil stockpiles.
Speculators mostly kept on the sidelines, with light volumes across most risk assets including oil, but the risks in oil prices seemed to point towards gains, with the possibility of new Western sanctions on Russia, the world's top crude producer.
"There is a lot of tough talk going on at the moment and the potential is there for further sanctions on Russia, which would have an impact across energy markets," said Ben Le Brun, a market analyst at Sydney-based trader OptionsXpress.
Brent crude for September delivery was up 12 cents at $107.80 a barrel at 0334 GMT, while U.S. oil for August delivery traded 25 cents higher at $104.84 a barrel. The U.S. front-month contract expires on Tuesday.
The European benchmark has kept in a tight range since surging nearly 2 percent last Thursday after news that a Malaysian Airlines jet had been shot down over eastern Ukraine.
"Markets have taken comfort from the fact that it does appear the plane was accidentally shot down. If it was shot down deliberately, we would see massive premiums in oil prices," said Le Brun.
"But it seems like it's Russia versus the West at the moment, and there has to be a little bit of risk premium to the oil price on that basis," he said.
Reports that Ukrainian forces were moving into the eastern city of Donetsk added to concerns that the conflict may escalate.
The conflict in Gaza added to worries that tensions may spread across the Middle East, as Israeli jets, tanks and artillery continued to pound the territory and the death toll from a two-week conflict topped 500.
OIL STOCKS SEEN LOWER
Oil investors will turn their focus to weekly U.S. commercial crude oil inventories, which are likely to have dropped 2.8 million barrels in the week to July 18, according to a preliminary Reuters survey of four analysts.
The survey was taken ahead of weekly inventory reports from industry group the American Petroleum Institute (API) due at 2030 GMT and from the U.S. Department of Energy's Energy Information Administration (EIA) due on Wednesday.
Domestic crude stocks fell by 7.5 million barrels the previous week, the biggest draw since January, caused by a sharp increase in refinery activity.
Refiners in the United States are bidding furiously for crude in the opaque physical market, paying the highest premiums in months for coastal grades like Light Louisiana Sweet WTC-LLS and Mars WTC-MRS.
The buying has turned the cash crude market upside down, with WTI crude in the delivery point of Cushing, Oklahoma, WTI- trading at a discount of under $1 a barrel to cash Brent-Forties-Oseberg-Ekofisk crude BFO-, according to Reuters data.
In the futures market, however, the September Brent/WTI contract CL-LCO1=R is trading at nearly $5 a barrel, broadly in line with its range this year.
Investors will also be watching monthly U.S. inflation data due at 1230 GMT, followed by home sales at 1300 GMT. (Reporting By Jacob Gronholt-Pedersen; Editing by Alan Raybould)