Oil hovers near seven-month highs ahead of US-Iran talks

By Katya Golubkova and Jeslyn Lerh

SINGAPORE, Feb 25 (Reuters) - Oil prices were hovering near seven-month highs on Wednesday as the threat of military conflict between the U.S. and Iran that could disrupt supply continued to worry investors as talks between the parties are set for Thursday. 

Brent futures were up 43 cents, or 0.6%, at $71.20 per barrel at 0400 GMT. WTI futures rose 38 cents, or 0.6%, to $66.01.

Brent prices reached their highest since July 31 on Friday, while WTI hit its highest since August 4 on Monday, and both contracts have held near there as the U.S. has positioned military forces in the Middle East to compel Iran to negotiate an end to its nuclear and ballistic missile programme.

An extended conflict could disrupt supplies from Iran, the third-biggest crude producer in the Organization of the Petroleum Exporting Countries, and other countries in the key Middle East producing region. 

"This uncertainty means the market will continue to price in a large risk premium and remain sensitive to any fresh developments," ING commodities strategists said on Wednesday.

U.S. envoys Steve Witkoff and Jared Kushner are slated to meet with an Iranian delegation for a third round of talks on Thursday in Geneva. 

Iran's Foreign Minister Abbas Araqchi said on Tuesday that a deal with the U.S. was "within reach, but only if diplomacy is given priority". 

"(U.S.) President (Donald) Trump has warned that without a deal, there will be 'very bad consequences'. Whether (Iran's) concessions will meet the U.S.'s 'zero enrichment' red line remains to be seen," Tony Sycamore, IG market analyst, said in a note.

Amid the heightened tensions, Iran and China have accelerated talks to purchase Chinese anti‑ship cruise missiles, according to Reuters sources, which could target the U.S. naval forces that have assembled near the Iranian coast.

Anti‑ship cruise missiles would enhance Iran's strike capabilities and threaten the U.S. naval forces, according to experts. 

Trump will deliver the traditional State of the Union address to Congress on Tuesday evening. Two White House officials, speaking on condition of anonymity, said Trump will discuss his plans for Iran but did not offer details.

While geopolitical tensions have supported prices, the market is also contending with concerns of large inventory gains as global supply is exceeding demand. 

According to market sources, the American Petroleum Institute late on Tuesday reported a massive increase in U.S. oil stockpiles of 11.43 million barrels in the week ended February 20.

However, gasoline and distillate inventories fell, the sources said, citing the API data.  

Official U.S. oil inventory reports from the Energy Information Administration are due later on Wednesday.,

(Reporting by Katya Golubkova in Tokyo and Jeslyn Lerh in Singapore; Editing by Christian Schmollinger and Thomas Derpinghaus)