Oil prices rose by a dollar a barrel on Tuesday as supply disruptions mounted and traders bet that demand will grow if the U.S. Federal Reserve lowers borrowing costs this week, as is widely expected.

Both contracts settled at their highest so far this month. U.S. crude futures rose $1.10, or 1.6%, to $71.41. Brent crude futures gained 95 cents, or 1.3%, to settle at $73.70 per barrel.

More than 12% of crude output from the U.S. Gulf of Mexico was offline after Hurricane Francine last week, lifting oil prices in four of the last five sessions, a rebound after Brent last Tuesday hit the lowest in nearly three years.

Prices also found support from renewed tensions in the Middle East, analysts at AEGIS Hedging said.

Militant group Hezbollah promised to retaliate against Israel after pagers detonated across Lebanon on Tuesday, killing at least eight people and wounding nearly 3,000 others who included fighters and Iran's envoy to Beirut. Israel declined to comment on the detonations.

Prices drew support from supply disruption in Libya, where a rift between rival factions over control of the central bank has led to lower oil output and exports, Rystad analysts said on Tuesday.

Talks led by the United Nations to solve the crisis failed to reach an agreement this week.

Libyan crude exports rose three-fold last week to about 550,000 barrels per day, a Reuters review of Kpler shipping data showed. That was still half the OPEC producer's exports last month of over 1 million bpd, the data showed.

Investors also hoped the Fed's widely anticipated rate cut could revitalize demand in the top oil consuming nation.

Fed funds futures showed markets pricing in a 69% chance that the central bank will cut rates by 50 basis points.

A cut of that magnitude could soften the U.S. currency and boost oil and other dollar-denominated commodities, independent energy and shipping analyst Matias Togni wrote, opens new tab on Tuesday.

The country's imports are approaching this year's highest levels at over 11 million bpd this month, he added.

Oil prices were broadly unchanged after market sources said data from the American Petroleum Institute showed both oil and fuel stockpiles rose last week.

Analysts expect oil stockpiles to drop by about 500,000 barrels, according to an extended Reuters poll. The U.S. Energy Information Administration's official report is due on Wednesday at 10:30 a.m. ET. – Reuters