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US prepares to evacuate Iraqi embassy, sources say

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US-China trade talks in focus

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US crude stocks fall; gasoline, distillate inventories up

-EIA

(Updates prices and market activity to settlement)

By Nicole Jao

NEW YORK, June 11 (Reuters) - Oil prices rose more than

4% on Wednesday, to their highest in more than two months, after

sources said the U.S. was preparing to evacuate its Iraqi

embassy due to heightened security concerns in the Middle East.

Brent crude futures settled $2.90, or 4.34%, higher

to $69.77 a barrel. U.S. West Texas Intermediate crude

gained $3.17, or 4.88%, to $68.15. Both Brent and WTI reached

their highest since early April.

Surprised traders bought crude futures on reports the U.S.

was preparing to evacuate its embassy in Iraq, OPEC's No. 2

crude producer after Saudi Arabia. A U.S. official said military

dependents could also leave Bahrain.

"The market wasn't expecting this big geopolitical risk,"

said Phil Flynn, analyst at Price Futures Group.

Earlier, Iran's Minister of Defense Aziz Nasirzadeh said

Tehran will strike U.S. bases in the region if nuclear talks

fail and conflict arises with Washington.

Trump said he was less confident that Iran would agree to

stop uranium enrichment in a nuclear deal with Washington,

according to an interview released on Wednesday.

Ongoing tension with Iran means its oil supplies are likely

to remain curtailed by sanctions.

Supplies will still increase, as OPEC+ plans to boost oil

production by 411,000 barrels per day in July as it looks to

unwind production cuts for a fourth straight month.

"Greater oil demand within OPEC+ economies - most notably

Saudi Arabia - could offset additional supply from the group

over the coming months and support oil prices," said Capital

Economics' analyst Hamad Hussain in a note.

Also keeping prices elevated was news of a trade deal

between the U.S. and China, which could boost energy demand in

the world's two biggest economies.

Trump said Beijing would supply magnets and rare earth

minerals and the U.S. will allow Chinese students in its

colleges and universities. Trump added the deal is subject to

final approval by him and President Xi Jinping.

The trade-related downside risk in oil has been temporarily

removed, although the market reaction has been tepid as it is

not clear how economic growth and global oil demand will be

affected, PVM analyst Tamas Varga said.

In the U.S., crude inventories fell by 3.6 million barrels

to 432.4 million barrels last week, the Energy Information

Administration said. Analysts polled by Reuters had expected a

draw of 2 million barrels.

"It's a bullish report," said Bob Yawger, director of energy

futures at Mizuho, adding that the demand for motor gasoline

began to strengthen.

Product supplied for motor gasoline, a proxy for demand,

rose by about 907,000 barrels per day last week, to 9.17 million

bpd.

U.S. consumer prices increased only marginally in May,

deepening the conviction in financial markets that the Federal

Reserve will start cutting interest rates by September. Lower

interest rates can spur economic growth and demand for oil.