By Georgina McCartney
(Reuters) - Oil prices settled lower on Friday but recorded a second straight week of gains, garnering support from a U.S. interest rate cut and a dip in U.S. supply.
Brent futures settled down 39 cents, or 0.52%, at $74.49 a barrel. U.S. WTI crude futures settled down 3 cents, or 0.4%, to $71.92.
Signs of a slowing economy in major commodity consumer China gave prices a ceiling. But for the week, both benchmarks settled up more than 4%.
Prices have recovered after Brent fell below $69 for the first time in nearly three years on Sept. 10.
"The market concluded that a sub-$70 level combined with hedge funds holding a record weak belief in higher prices of crude and fuel products would require a recession to be justified, a risk this week's bumper U.S. rate cut helped reduce," Ole Hansen, head of commodity strategy at Saxo Bank, said.
Prices rose more than 1% on Thursday, a day after the U.S. central bank's decision to cut interest rates by half a percentage point.
Interest rate cuts typically boost economic activity and energy demand, but some analysts are worried about weakness in the U.S. labour market.
"U.S. interest rate cuts have supported risk sentiment, weakened the dollar and supported crude this week," said Giovanni Staunovo, an analyst at UBS.
"However, it takes time until rate cuts support economic activity and oil demand growth," he added.
The Fed projected a further 50 basis points of rate cuts by the end of this year, a full percentage point of cuts next year and a further half-percentage-point reduction in 2026.
"The Fed's decision to cut interest rates and some hangover from Hurricane Francine are the only two things that are propping up the market up right now," said Tim Snyder, chief economist at Matador Economics.
"The thought of another 50 to 75 basis points has markets hopeful for some degree of economic stability," he added.
About 6% of crude production and 10% of natural gas output in the U.S. Gulf of Mexico were offline in the aftermath of Hurricane Francine, the U.S. Bureau of Safety and Environmental Enforcement said on Thursday in its final update on the storm.
Additional support for oil prices came from a decline in U.S. crude inventories to a one-year low last week. [EIA/S]
Rising tensions in the Middle East, raising the risk of supply disruption, further boosted the oil market. Israel announced on Friday it killed a top Hezbollah commander and other senior figures in the Lebanese movement in an airstrike on Beirut as fears of a wider war rise.
Still, U.S. President Joe Biden said reaching a Gaza ceasefire deal remains realistic, telling reporters: "We have to keep at it."
In China, refinery output slowed for a fifth straight month in August and industrial output growth hit a five-month low.
China also issued its third and likely final batch of fuel export quotas for the year, keeping volume in line with 2023 levels. "This move indicates that refinery margins are too weak to justify increased activity," StoneX Analyst Alex Hodes said in a note on Friday.
Meanwhile, oil refiners in Asia, Europe and the U.S. face a drop in profitability to multi-year lows.