FILE PHOTO: An oil pump of IPC Petroleum France is seen at sunset outside Soudron, near Reims, France, August 24, 2022. REUTERS/Pascal Rossignol/File Photo

By Georgina McCartney

HOUSTON (Reuters) -Oil prices settled higher on Thursday, recovering from the previous day's drop, on news that the U.S. and China agreed to more trade talks following a phone call between U.S. President Donald Trump and Chinese leader Xi Jinping.

Brent crude futures settled up 48 cents, or 0.7%, at $65.34 a barrel. U.S. West Texas Intermediate crude settled up 52 cents, or 0.8%, at $63.37 a barrel.

"If we step back from the brink of a major trade war, it will increase demand expectations for oil both in the U.S. and in China," said Phil Flynn, senior analyst with Price Futures Group.

The official Xinhua news agency reported earlier that the talks were held at Trump's request.

Trump said on social media his call with Xi focused primarily on trade and led to "a very positive conclusion." He announced further lower-level U.S.-China discussions.

"We're in very good shape with China and the trade deal," he told reporters later.

Canadian Prime Minister Mark Carney and Trump are also in direct communication as part of Ottawa's bid to persuade Washington to lift tariffs, Industry Minister Melanie Joly said.

The news encouraged investors a day after oil fell 1% as data showed U.S. gasoline and distillate stockpiles grew more than expected, reflecting weaker demand in the world's largest economy. [EIA/S]

Geopolitical events and wildfires in Canada that threaten to reduce oil production are providing further price support, despite a potentially oversupplied market in the second half of the year with expected OPEC+ production hikes, PVM analyst Tamas Varga said.

Curbing gains on Thursday, Saudi Arabia, the world's biggest oil exporter, cut its July prices for Asian crude buyers to nearly the lowest level in two months.

The Saudi price cut followed a move by OPEC+ last weekend to increase output by 411,000 barrels per day for July.

The strategy of Saudi Arabia, OPEC's de facto leader, is partly to punish over-producers by potentially unwinding 2.2 million bpd of cuts between June and the end of October, in a bid to wrestle back market share, Reuters previously reported.

In economic news, data on Wednesday showed the U.S. services sector contracted in May for the first time in nearly a year.

The number of Americans filing new applications for unemployment benefits increased for the week ending May 31, marking the second straight weekly jump, the Labor Department said on Thursday, citing softening labor market conditions amid mounting economic headwinds from Trump's tariffs.

The release on Friday of the U.S. nonfarm payrolls report for May could influence the U.S. Federal Reserve's interest rate policy, while the market's focus will also be on geopolitical tensions in the Middle East, UBS analyst Giovanni Staunovo said.

(Reporting by Georgina McCartney in Houston, Enes Tunagur in London, Katya Golubkova in Tokyo and Emily Chow in Singapore; Editing by David Gregorio, Richard Chang and Nia Williams)