OIL PRICE: BRENT ABOVE $90, WTI ABOVE $85

REUTERS - April 12  - Oil prices rose on Friday as heightened tensions in the Middle East raised the risk of supply disruptions from the oil-producing region, though prices are set for weekly losses amid expectations of fewer U.S. interest rate cuts this year.

Brent crude futures climbed 51 cents, or 0.57%, to $90.25 a barrel by 0420 GMT, while U.S. West Texas Intermediate crude futures rose 61 cents, or 0.72%, to $85.63.

The gains erased some losses from the previous session, which was dominated by worries about stubborn U.S. inflation that dampened hopes for an interest rate cut as early as June.

Suspected Israeli warplanes bombed Iran's embassy in Damascus in a strike for which Iran has vowed revenge, ratcheting up tensions in a region already strained by the Gaza war.

Israel has not said it was responsible but Iran's supreme leader, Ayatollah Ali Khamenei, said on Wednesday Israel "must be punished and it shall be" for the attack.

The U.S. expects an attack by Iran against Israel but one that would not be big enough to draw Washington into war, according to a U.S. official. Iranian sources said that Tehran has signalled a response aimed at avoiding major escalation.

Israel is keeping up its war in Gaza but is also preparing for scenarios in other areas, Prime Minister Benjamin Netanyahu said on Thursday.

"The geopolitical risks remain elevated," ANZ Research said in a note, adding that oil prices have jumped almost 19% also supported by improving economic conditions and supply cuts by the Organization of the Petroleum Exporting Countries and allies, together called OPEC+.

In Europe, where the labour market has begun to soften and growth is stagnating, central bankers left the policy rate unchanged on Thursday but signalled they remain on track to cut rates as soon as June.

"The European Central Bank's decision to leave policy rates unchanged ... was expected, but accompanying statements open the door for near-term monetary easing," S&P Global Market Intelligence said in a note.

However in the U.S., Federal Reserve officials signalled on Thursday that there was no rush to cut interest rates as sticky U.S. inflation remains a concern.

Oil prices were still set for weekly declines as Brent and WTI were heading for more than a 1% drop as of 0420 GMT on Friday.

ING analysts said they expect a pullback in oil's rally if there is no further escalation in the Middle East or supply disruptions, adding that OPEC's latest monthly market report was also in line with expectations.

"We maintain our forecast for Brent to average $87 a barrel over the second quarter of this year," the ING analysts added.

-----