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Middle East conflict raises supply concerns

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China's economic slowdown weakens oil demand

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US crude production hits record high

(Updates with settlement price at 2:30 p.m. ET)

By Arathy Somasekhar

HOUSTON, Oct 21 (Reuters) - Oil prices settled nearly 2%

higher on Monday, recouping some of last week's more than 7%

decline, with no letup of fighting in the Middle East and

expected Israeli retaliation on Iran worrying markets about

supply from the region.

Brent crude futures were up $1.23, or 1.68%, at

$74.29 a barrel, while U.S. West Texas Intermediate crude

futures were $1.34, or 1.94% higher, at $70.56 a barrel.

Brent settled more than 7% lower last week, while WTI lost

around 8%. Those were the contracts' biggest weekly declines

since Sept. 2, due to slowing economic growth in China and

falling risk premiums in the Middle East.

Israeli forces besieged hospitals and shelters for displaced

people in the northern Gaza Strip on Monday, medics said, as

they stepped up operations against Palestinian militants. Israel

also carried out targeted strikes on sites belonging to

Hezbollah's financial arm in Lebanon.

U.S. Secretary of State Antony Blinken will make another

push for a ceasefire when he heads to the Middle East on Monday,

the State Department said, seeking to kick-start negotiations to

end the Gaza war and also defuse the spillover conflict in

Lebanon.

U.S. envoy Amos Hochstein will hold talks with Lebanese

officials in Beirut on Monday on conditions for a ceasefire

between Israel and Hezbollah, two sources told Reuters.

"Crude futures getting a lift this morning as escalated

fighting continues in Middle East... Israel is also preparing

for more retaliatory attacks likely into Iran," said Dennis

Kissler, senior vice president of trading at BOK Financial.

"The sell-off in crude over the past two weeks was mostly on

long liquidation as the crude market continues to search for an

equilibrium between slowing demand and continued unrest in the

Middle East," he added.

China on Monday cut benchmark lending rates as anticipated,

part of a broader package of stimulus measures to revive the

economy.

Data on Friday showed China's economy grew at the slowest

pace since early 2023 in the third quarter, fuelling growing

concerns about oil demand.

China's oil-demand growth is expected to remain weak in 2025

despite recent stimulus measures from Beijing as the world's No.

2 economy electrifies its car fleet and grows at a slower pace,

the head of the International Energy Agency said on Monday.

Saudi Aramco's CEO told an energy conference in Singapore on

Monday that he was still "fairly bullish" on China's oil demand

in light of stepped-up policy support aimed at boosting growth,

and on rising demand for jet fuel and liquid-to-chemicals.

Meanwhile, Minneapolis Federal Reserve Bank President Neel

Kashkari on Monday repeated that he expects "modest"

interest-rate cuts over the coming quarters, though a sharp

weakening of labor markets could move him to advocate for faster

rate cuts.

Lower interest rates cut the cost of borrowing, which can

spur economic activity and boost demand for oil.

The U.S. Energy Information Administration said last week

that weekly oilfield production rose by 100,000 barrels per day

to a record 13.5 million bpd during the week ended Oct. 11.

U.S. crude oil stockpiles likely rose by about 100,000

barrels last week, while distillate and gasoline inventories

were seen down, a preliminary Reuters poll showed on Monday.

(Additional reporting by Robert Harvey in London, Colleen Howe

in Beijing; Editing by Jan Harvey, David Evans, Ros Russell and

Bill Berkrot)