U.S. crude rises as supply concerns mount

The headquarters of the Organization of the Petroleum Exporting Countries (OPEC) is pictured during a meeting of OPEC oil ministers in Vienna, June 8, 2011.

LONDON/NEW YORK (Reuters) - U.S. crude oil rose in choppy trade on Thursday on concerns about supply as investors assessed the impact of OPEC's failure to agree on a rise in output targets which threw a spotlight on supply concerns.

U.S. crude for July delivery rose 83 cents to $101.57 by 3:05 p.m. British time. Brent crude added 21 cents to $118.06 a barrel.

"The non-outcome reinforces the floor under oil prices and leaves the output gap in place, but there is clear evidence of a slowdown in the global economy keeping demand in check," said Harry Tchilinguirian, an oil analyst at BNP Paribas.

However dollar gains limited oil strength, particularly for Brent crude, in volatile trade. A stronger dollar makes commodities priced in the U.S. currency less attractive to holders of different currencies.

The dollar .DXY rose sharply after the European Central Bank (ECB) slightly lowered its inflation forecasts.

Some analysts said ECB President Jean-Claude Trichet sounded a slightly less hawkish tone than in previous meetings, which pushed down interest rate expectations and made holding the dollar relatively attractive.

"The dollar seems to be capping any further gains for crude that might be expected after the OPEC meeting," said Chris Dillman, analyst at Tradition Energy in Stamford, Connecticut.

Overall, however, worries about tight oil supply kept prices in positive territory.

DEMAND SQUEEZE

Crude oil prices are at levels that governments around the world fear are hurting demand and threatening economic recovery.

Talks by oil ministers of the Organisation of the Petroleum Exporting Countries (OPEC) broke down in acrimony on Wednesday, but Saudi Arabia pledged unilaterally to ensure plentiful supplies, helping cap gains in oil.

These competing pressures of worries about supply and ailing growth have kept prices in a tight range since early May.

Tchilingurian said the breakdown in talks didn't move prices more because the fundamental supply situation remained unchanged and individual countries would step in to meet demand as needed.

Also helping to allay concerns about the supply outlook, Libya's rebel oil minister said the rebels hoped to restart oil production soon and had gained aid pledges of over $500 million.

"Saudi Arabia's comments on oil supply and the news out of Libya add to confidence on sentiment about the supply outlook," said Julian Lee, senior energy analyst at the Centre for Global Energy Studies.

Western and Arab nations were meeting in Abu Dhabi on Thursday to focus on what one U.S. official called the "end-game" for Libyan leader Muammar Gaddafi as NATO again stepped up the intensity of air raids on Tripoli.

Olivier Jakob, an analyst at Petromatrix in Zug, predicted the West will have removed Gaddafi by the end of the year, leading to an increase in spare capacity for 2012.

The United States, the world's top oil consumer, had put pressure on Saudi Arabia to deliver a credible deal to cap crude prices and underpin faltering economic growth.

President Barack Obama is keeping open the option of using the U.S. strategic oil reserves to cover any supply gap, but no decision has been made, a White House spokesman said.

Oil prices have rallied since the start of the year on the loss of Libyan oil production because of a civil war, and were approaching 2008 peaks before falling by more than 10 percent in early May. They have traded in a narrow range since then.

(Additional reporting by Randy Fabi and Manash Goswami in Singapore; editing by Jason Neely)