By Devika Krishna Kumar
NEW YORK (Reuters) - Oil prices edged up in cautious trade on Tuesday as expectations of higher U.S. shale output and inventories vied with worries that crude supply from the Middle East could be disrupted by looming U.S. sanctions on Iran and growing tensions with top exporter Saudi Arabia.
U.S. Senator Lindsey Graham accused Saudi Crown Prince Mohammed bin Salman of ordering the murder of Saudi journalist Jamal Khashoggi and said the prince was jeopardizing relations with the United States.
U.S. President Donald Trump said the Saudi crown prince intends to expand an investigation into the disappearance of Khashoggi and that the prince did not know what happened in the Turkish consulate where Khashoggi apparently disappeared.
"The focus within the oil trade during the next couple of weeks is likely to be on Iran and Saudi Arabia," Jim Ritterbusch, president of Ritterbusch and Associates, said in a note.
"We don't expect the Kingdom to be as accommodative to the White House requests for stronger production," he said, adding that the Saudis could cut as much as 500,000 barrels per day of production "as a warning shot should the U.S. opt to impose any type of sanction in response to the Khashoggi developments."
Trump has urged the Organization of the Petroleum Exporting Countries to raise output to help cover a shortfall due to new U.S. sanctions on Iran. The market has been supported by reports that Iranian crude exports may be falling faster than expected ahead the Nov. 4 deadline on sanctions.
Brent crude rose 63 cents, or 0.8 percent, to settle at $81.41 a barrel, while West Texas Intermediate (WTI) crude ended the session up 14 cents at $71.92 a barrel.
Last week, oil prices slumped as global stock markets fell, but a recovery in financial markets, boosted by earnings growth helped provide support to oil prices on Tuesday, traders said. [.N]
Prices extended gains in post-settlement trade after data from the American Petroleum Institute (API) showed a surprise decline in U.S. crude inventories. Stockpiles fell 2.1 million barrels last week, versus forecasts for a 2.2 million-barrel build. [API/S]
Stocks at the Cushing, Oklahoma, delivery hub for WTI rose by 1.5 million barrels, the API said, the fourth straight week of increases, if confirmed by official data due at 10:30 a.m. EDT (1430 GMT) on Wednesday. [EIA/S]
Weak U.S. gasoline margins and growing U.S. shale output could also cap gains in crude prices, market participants said.
"The weakening crude spreads almost globally in the face of Iran sanctions is likely generating some concern on how strong market really is and if it's ready to rally more," said Scott Shelton, energy futures broker with ICAP in Durham, North Carolina.
Front-month Brent crude futures traded at the lowest premium in over a month to futures for delivery one year from now. Meanwhile, front-month U.S. crude futures traded near the smallest premium to the 12th month in about 10 months.
"We think that one of the major factors that is leading to a scaling back of long positions is a reappraisal of short-term fundamentals by investors," Standard Chartered analysts said in a note.
Any supply deficit in the fourth quarter was unlikely to be large enough to do more than support prices, they said.
(Reporting by Devika Krishna Kumar in New York, Christopher Johnson in LONDON and Jane Chung in SEOUL; Editing by David Gregorio and Marguerita Choy)