* Iraq sees some flexibility for OPEC, non-OPEC deal
* API data shows larger-than-expected inventory build
* Hess, Continental, Noble slash 2016 capital spending
(New throughout, updates prices and market activity following
API numbers)
By Devika Krishna Kumar
NEW YORK, Jan 26 (Reuters) - Oil prices surged on Tuesday,
settling more than 4 percent higher as investors found reasons
to hope for output cuts that could eventually reduce one of the
biggest global supply gluts in decades.
Crude jumped after OPEC renewed calls for rival producers to
cut supply alongside its members. More buying
emerged after U.S.-based global oil producer Hess Corp (N:HES) HES.N
said it planned to cut capital spending by 40 percent this year.
After settlement, other U.S. producers announced
spending cuts.
Brent crude LCOc1 settled up $1.30, or 4.26 percent, at
$31.80 a barrel, rebounding from a decline at the start of the
session to top out at $32.72.
U.S. crude CLc1 rose 3.7 percent, or $1.11, to settle at
$31.45 a barrel. During the session it rose as high as $32.41.
The contract briefly turned negative in post-settlement
trade after data from the American Petroleum Institute, an
industry group, showed a larger-than-expected inventory build in
U.S. crude stocks in the week to Jan. 22.
Still, Crude stocks at the Cushing, Oklahoma, delivery hub
fell by 664,000 barrels, API said.
Some analysts had expected a fall in the inventory at the
delivery hub as Canadian oil sands producers start to cut
output.
U.S. government data on U.S. crude oil stocks is due on
Wednesday. EIA/S
Saudi Arabia, kingpin of the Organization of the Petroleum
Exporting Countries, and top non-OPEC producer Russia are
showing signs of flexibility about agreeing to tackle the global
oil glut, the oil minister of Iraq said.
Worries about the Chinese economy limited crude's gains. The
country is the world's second largest oil consumer.
Last Wednesday Brent hit its lowest price since November
2003 at $27.10, before rebounding 15 percent on Thursday and
Friday.
Tim Evans, energy futures specialist at Citi Futures wrote
in a note that "it remains uncertain whether Saudi Arabia and
its allies within OPEC are ready to return to the bargaining
table" to negotiate cuts in crude output.
"Without Saudi Arabia on board, there's simply no deal and
the market will be left to rebalance naturally as non-OPEC
output declines, a slow and still painful process"
Even with oil's near 20-percent drop to 12-year lows, major
OPEC producers have not reduced production. Some, like Iraq,
plan to boost supply.
OPEC's Gulf members have insisted OPEC will not cut
production alone, which would cede market share to rivals.
David Hufton of oil brokers PVM reckons an agreement could
put oil back in a range of $40 to $60 per barrel.
Following the Hess announcement of spending cuts, traders
said they expected similar steps from other U.S. producers.
"I think you're going to see more capital spending cuts - it
usually happens when prices start to bottom out," said Phil
Flynn, analyst at the Price Futures Group brokerage in Chicago
"It's significant that the market is now reacting positively
to positive news, which means some of the fear is now starting
to subside."
After crude settled, North Dakota's No. 2 crude producer
Continental Resources Inc CLR.N said it would slash its 2016
capital budget by 66 percent. Noble Energy Inc (N:NBL) NBL.N also said
it will cut spending about 50 percent this year.
Traders also watched the dollar as U.S. Federal Reserve
policy makers opened a two day meeting on Tuesday.
The strength of the dollar has made oil more expensive for
buyers in other currencies.
If the Fed acknowledges that global markets are weak, it
could reassure oil traders "that they can find a bottom" Flynn
said. "The pieces are in place for at least a temporary bottom
in oil"
(Additonal reporting by Alex Lawler in London and Meeyoung Cho
in Seoul; editing by David Gregorio and Alden Bentley)