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U.S. oil edges up on expectations of inventory drawdown

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NEW YORK - U.S. crude oil edged up on Monday as traders moved to cover short positions amid expectations on further draws in domestic crude inventory stocks.

Brent was weaker but the markets were supported by a number of geopolitical risks carrying over from last week, including President Barack Obama's authorization for the first U.S. air strikes on Iraq since he pulled all troops out in 2011.

"The market is trying to price some geopolitical risk back in," said Gene McGillian, an analyst at Tradition Energy in Stamford. "We're essentially expecting falling WTI (U.S. crude) stockpiles and if it weren't for export demand for distillates on the product side, the market would be weaker."

By 12:23 p.m. (1423 GMT), U.S. crude was 23 cents higher at $97.88 a barrel, while Brent fell 17 cents to $104.85 a barrel.

Much of the movement was a result of traders trying to narrow Brent's premium over U.S. crude <CL-LCO1=R>, which widened to as much as $8.10 on Thursday, the most since the end of June.

"I think what we're seeing is a bit of a carry over from last week," said Dominick Chirichella, senior partner at theEnergy Management Institute. "We're seeing short covering in the Brent-WTI spread and expecting a draw in inventory to affect that."

On the international front, Iraq's president asked the Shi'ite coalition's nominee for prime minister to form a government, challenging incumbent Nuri al-Maliki who has vowed to seek a third term.

NATO chief Anders Fogh Rasmussen told Reuters in an interview he saw a "high probability" that Russia could intervene militarily in eastern Ukraine and that NATO saw no sign that Moscow was pulling back its forces from close to the border.

Meanwhile, Russia massed 45,000 troops on its border with Ukraine, backed by an array of heavy equipment, according to a Ukrainian military spokesman.

Despite the market not responding quickly to the news, others reasoned the market may be trying to find its bearings.

"I think the whole market is rallying as the geopolitical landscape is continually shifting," said Ed Kevelson, Head of U.S. Energy OTC at Newedge. "Every time traders think those risks are off the table or not germane, something pops up." 

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