Oil slips towards $109 after six-week high on Ukraine

By David Sheppard

LONDON (Reuters) - Brent crude oil slipped towards $109 a barrel on Thursday, after hitting a six-week high in the previous session, as traders assessed whether rising tensions in Ukraine could disrupt supplies from Russia.

With Russian troops massing on the border with Ukraine and three separatists killed overnight in eastern Ukraine, the prospects of defusing the crisis at talks in Geneva appeared slim.

Brent crude for June delivery was down 43 cents at $109.17 a barrel by 1137 GMT, after hitting $110.36 on Wednesday, the highest since March 4.

While the United States and European Union have stopped short of imposing sanctions on Russia's oil and gas exports, tensions with between them and the world's second-largest crude exporter have energy markets on edge.

"Oil prices remain supported by the Ukrainian risk premium ahead of the long Easter weekend," said Abhishek Deshpande, a commodities analyst at Natixis in London.

"While the talks in Geneva may be weighing on prices slightly, with clashes continuing in Ukraine as we speak, the chance of a resolution being found today is not very high." U.S. oil for delivery in May fell 10 cents to $103.66 a barrel. The contract had also touched a six-week high of $104.99 in the previous session.

Russian President Vladimir Putin accused Ukraine's leaders on Thursday of committing a "grave crime" by using the army to try to quell unrest in the east of the country and did not rule out sending in Russian troops.

But addressing Russians in his annual televised phone-in, Putin said he hoped he would not need to take such a step and that diplomacy could succeed in resolving the standoff.

Meanwhile, data showed U.S. industrial production rose at a faster-than-expected clip in March, the latest sign that the economy of the world's largest oil consumer is gaining momentum.

China's economy grew 7.4 percent in the first quarter, the lowest in six quarters but ahead of market expectations. The data, released on Wednesday, was a relief for investors expecting the worst in the world's No. 2 economy and oil consumer, helping boost gains in riskier assets.

INVENTORY JUMPS

A softer dollar also supported gains in dollar-priced commodities after U.S. Federal Reserve Chair Janet Yellen stressed the need for accommodative policy, citing persistently low inflation and economic slack.

"Yellen's comments in terms of keeping interest rates at ultra-low levels for quite some time should feed through to fundamentally stronger demand for oil," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

U.S. oil prices rose despite a sharp spike in crude stockpiles in the United States last week as traders focussed on falling supplies at the benchmark contract's delivery point in Cushing, Oklahoma.

Crude oil stocks nationally climbed 10 million barrels to 394 million barrels in the week ended April 11, according to the U.S. Energy Information Administration (EIA), but fell at Cushing by 770,000 barrels to the lowest level since 2009.

New pipeline infrastructure increasing Cushing's connection to the Gulf Coast refining centre had drained stocks by 36 percent since late January to 26.8 million barrels, narrowing U.S. crude's discount to Brent.

U.S. crude for June delivery was trading $6.35 below Brent on Thursday.

(Additional reporting by Manolo Serapio Jr. and Florence Tan in Singapore; Editing by Louise Ireland and Jane Baird)