UPDATE 8-Brent rises 1% as Saudi supply risks come into focus

* US building coalition after Saudi attack, Iran warns
against war
* Return to full Saudi capacity pledged by end of November
* Global spare capacity extremely low
* United States to impose more sanctions on Iran

(Adds settlement prices)
By Collin Eaton
HOUSTON, Sept 19 (Reuters) - Brent crude oil prices rose
more than 1% on Thursday on fears of longer-than-expected supply
shortfalls following Saturday's attacks on a key Saudi Arabian
oil processing facility and escalating tensions in the Middle
East.
Global benchmark Brent LCOc1 settled 80 cents, or 1.3%,
higher at $64.40 a barrel, while U.S. West Texas Intermediate
(WTI) crude CLc1 pared earlier gains and ended largely steady
at $58.13 a barrel, just 2 cents firmer.
Saturday's attacks knocked out around half of Saudi Arabia's
crude production and severely limited the country's spare
capacity, a cushion for oil markets in any unplanned outage.
Tensions have escalated as the United States and Saudi Arabia
blamed the attacks on Iran.
"The Saudi oil industry could be threatened again and we
could see more supply disruption from the Persian Gulf," said
Gene McGillian, vice president of market research at Tradition
Energy in Stamford, Connecticut.
"What's hanging over the market's head is the response that
may be coming. How will the U.S. and Saudi Arabia respond to
this?" he said.
Saudi Arabia, the world's leading crude exporter, has said
the crippling attacks on its oil sites were "unquestionably
sponsored" by regional rival Iran.
The United States said it was building a coalition to deter
Iranian threats after the Sept. 14 attack, while the U.S.
military said it was consulting with Saudi Arabia on ways to
mitigate threats from the north, which U.S. officials also
blamed on Iran. Billions of dollars spent by Saudi Arabia on cutting edge
Western military hardware mainly designed to deter high altitude
attacks proved no match for low-cost drones and cruise missiles
used in a strike that crippled its giant oil industry.
U.S. President Donald Trump said there were many options
short of war and added he had ordered the Treasury to
"substantially increase sanctions" on Tehran. Iran has denied
involvement in the strikes and warned Trump against being
dragged into war.
U.S. Secretary of State Mike Pompeo has described the
weekend strike as an act of war. He said Washington has been
discussing possible retaliation with Saudi Arabia and other Gulf
allies but wanted a peaceful resolution.
"We are still striving to build out a coalition in an act of
diplomacy while the foreign minister of Iran is threatening all
out war and to fight to the last American," Pompeo said. "We're
here to build up a coalition aimed at achieving peace."
Saudi Arabia has said it would restore lost production by
the end of this month, and bring its capacity back to 12 million
barrels per day by the end of November. The Wall Street Journal reported Saudi Arabia had asked
Iraq's State Organization for the Marketing of Oil (SOMO) for as
much as 20 million barrels of crude, but an Iraqi state news
agency said SOMO denied Saudi Arabia had requested crude
supplies for its refineries.
The oil market "is rapidly calling into question whether
Saudi Arabia can come through this as cleanly as they claim,"
said John Kilduff, a partner at Again Capital LLC in New York.
Also lifting prices, the U.S. dollar .DXY weakened and
traders were likely unwinding some short positions after this
week's turbulent trading, said Josh Graves, senior market
strategist at RJO Futures. But geopolitical risks were the
biggest factor in the price rise, he said.
"The fact that we haven't retraced back to the low-to-mid
$50s means there's an expectation Trump would intervene," Graves
said.