UPDATE 10-Oil falls about 2.5% as U.S. Gulf production returns

* Iran says seized vessel was smuggling fuel
* Britain, U.S. pledge to defend shipping interests
* Oil prices still down sharply this week
* GRAPHIC-U.S. petroleum stocks: https://tmsnrt.rs/2XkQF8e

(Updates prices)
By Jessica Resnick-Ault
NEW YORK, July 18 (Reuters) - Oil fell about 2.5% a barrel
on Thursday, weighed down by weakness in U.S. equities markets
and an expectation that crude output would rise in the Gulf of
Mexico following last week's hurricane in the region.
Prices were further weighed down by economic concerns as
U.S. equities were on track for a third consecutive decline.
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Brent crude LCOc1 futures settled down $1.73, or 2.7% at
$61.93 a barrel.
West Texas Intermediate crude CLc1 futures were down $1.48
a barrel, or 2.6% at $55.30.
The longer-term outlook for oil has also grown increasingly
bearish, market participants said on Thursday. Speculators have
exited options positions that could have provided exposure to
higher prices in the next several years, they said.
U.S. offshore oil and gas production has continued to return
to service since Hurricane Barry passed through the Gulf of
Mexico last week, triggering platform evacuations and output
cuts. Royal Dutch Shell RDSa.L , a top Gulf producer, said
Wednesday it had resumed about 80% of its average daily
production in the region.
"You have people that were trying to ride the whole storm
and a 9 million(-barrel) draw (in U.S. crude inventories) that
went with it last week," said Bob Yawger, director of energy at
Mizuho in New York. "This week the situation has totally changed
and everyone is trying to get out of the market."
The retreat from early session highs accelerated after each
benchmark fell below yesterday's low, which had provided
technical support, Yawger said.
Oil had fallen on Wednesday in response to a sharp rise in
U.S. stockpiles of products such as gasoline that pointed to
weak demand during the U.S. driving season.
Data from the U.S. Energy Information Administration showed
a larger-than-expected drawdown in crude stockpiles last week.
The summer driving season normally entails increased
consumption of gasoline.
In addition to the U.S. storm, Middle East tensions have
dictated market moves in recent weeks.
Crude rose early in the session after Iran said it had
seized a foreign tanker in the Gulf. Prices pulled back after it
emerged that the vessel had only a small cargo and was detained
on Sunday for fuel smuggling. "The oil price reaction on Thursday shows once again that
the conflict in the Middle East is far from solved and tensions
could flare up at any time," UBS analyst Giovanni Staunovo said.
"As oil keeps flowing, prices are likely to rise only
temporarily," Staunovo added.
Britain pledged to defend its shipping interests in the
region, and U.S. Central Command chief General Kenneth McKenzie
said the United States would work "aggressively" to enable free
passage after recent attacks on oil tankers in the Gulf.

Iran said the vessel impounded was the one it towed on
Sunday after the ship had sent a distress call. U.S. officials
said on Wednesday they were unsure whether an oil tanker towed
into Iranian waters had been seized or rescued. Reuters reported on Wednesday that shipping companies were
hiring unarmed security guards for voyages through the Gulf.
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TECHNICALS-Brent oil may fall to $61.48 L4N24J0BI
U.S. crude inventories, weekly changes since 2017 png https://tmsnrt.rs/2XlX17b
Iran's guards say it seized a foreign oil tanker in the Gulf IMG
https://tmsnrt.rs/32tzK6J
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