Oil prices rebound 1% on concerns wider Mideast conflict may cut supply

By Yuka Obayashi and Trixie Yap

(Reuters) -Oil prices rebounded by 1% on Tuesday, paring the previous session's loss, on supply concern amid an escalating Middle East conflict, stronger U.S. services sector data and a cut in production at Libya's Sharara oilfield.

Brent crude futures gained 76 cents, or 1%, to $77.06 a barrel by 0638 GMT, while U.S. West Texas Intermediate crude futures climbed 92 cents, or 1.26%, to $73.86.

On Monday, both benchmarks fell about 1% against a backdrop of falling global stock markets.

Oil's slide was limited by mounting concern that Iran, a key Middle Eastern producer, may retaliate against Israel and the U.S. for the assassination of a Hamas leader in Tehran and an Israeli attack that killed a Hezbollah commander in Lebanon, potentially leading to a wider regional war.

On Monday, at least five U.S. personnel were injured in an attack against a military base in Iraq, U.S. officials told Reuters. It was unclear whether the attack was linked to the retaliation threats.

The U.S. has been urging countries to convey to Iran that escalation is not in its interest, a State Department spokesperson said on Monday.

"Oil seems to have clawed back some of its losses as broader concerns of a possible escalation in Middle Eastern conflict continue to add (to) apprehensions in (the) oil market. The possibility of an all-out war in (the) Middle East is getting real, threatening global supplies," Priyanka Sachdeva, a senior market analyst at Phillip Nova in Singapore, said in an email.

Oil was also supported by overnight data showing service sector activity in the U.S., the world's biggest oil consumer, rebounded from a four-year low in July.

Price gains also occurred amid a broader rally in Asian equity markets after they plunged on Monday.

"The broad-based recovery in risk sentiments and more resilient U.S. services sector data offer some support for prices," said IG market strategist Yeap Jun Rong in an email.

"Concerns around U.S. growth risks are eased by resilience in U.S. services activities, but it may have to take more to reassure markets of a stronger global demand outlook for oil."

Worries over lower production at Libya's 300,000 barrel-per-day Sharara oil field buoyed prices further. Output at the field, one of the country's largest, has fallen by around 20% due to protests.

These production troubles have offset some of the earlier macro bearishness in the market, said ING analysts in a client note.

(Reporting by Yuka Obayashi in Tokyo and Trixie Yap in Singapore; Editing by Christopher Cushing and Christian Schmollinger)