Oil prices rebound by more than $2 a barrel on prospect of tightening US crude supplies

By Laila Kearney

NEW YORK, July 29 (Reuters) - Oil prices rose by more than $2 a barrel in early trade on Wednesday on shrinking U.S. crude inventories, recouping some of the previous session's losses caused by a pause in fighting between Washington and Tehran.

Brent futures increased by $2.71, or 3.2%, to $86.80 a barrel at 0002 GMT, while U.S. West Texas Intermediate (WTI) crude rose $2.26, or 3.4%, to $81.95.

U.S. crude inventories fell by about 3.3 million barrels in the week ended July 24 ,market sources said on Tuesday, citing data from the American Petroleum Institute.

Gasoline inventories, meanwhile, grew by 918,000 barrels, while distillate inventories climbed 355,000 barrels compared with a week earlier, the sources said.

Official inventory data from the Energy Information Administration is due later on Wednesday.

Further supporting prices, OPEC+ will likely halt oil output increases for three months starting in October, sources told Reuters, after the producer group completes the scheduled return of barrels following voluntary cuts.

Oil prices have whipsawed on the U.S.-Israeli war in Iran, which has disrupted global flows of crude oil, particularly with the effective closure of the Strait of Hormuz.

Prices plunged by about 5% on Tuesday to a two-week low on hopes that efforts to end the U.S.-Iran conflict would resume in earnest after a pause in hostilities.

U.S. President Donald Trump, who called off a two-week U.S. bombing campaign over the weekend, told .Fox News on Tuesday that there were "good talks" with Iran, but threatened more strikes if negotiations break down. Iran, however, has denied that it is seeking to resume talks with the U.S.

Meanwhile, a Gulf source and a Western diplomat told Reuters that Oman has presented Iran with a plan to manage the strait, which would include collecting voluntary fees for using the passageway.

The proposals, backed by Gulf states, aim to serve as a basis to end the disruption to trade through the strait caused by the war.

(Reporting by Laila Kearney in New York; additional reporting by by Arathy Somasekhar in HoustonEditing by Shri Navaratnam)