By Noah Browning

(Reuters) -Oil prices rose on Thursday on optimism that potential U.S. interest rate cuts will boost activity and fuel consumption in the U.S. economy, but concerns over slower global demand curbed gains.

futures were up 70 cents, or 0.9%, at $80.46 a barrel at 1222 GMT, recovering some of the previous day’s losses. U.S. West Texas Intermediate crude futures were up 76 cents, or 1%, at $77.74 per barrel.

Both benchmarks fell more than 1% on Wednesday after inventories rose unexpectedly.

U.S. consumer prices rose moderately in July and the annual increase in inflation slowed to below 3% for the first time in nearly 3-1/2 years, reinforcing expectations the Federal Reserve will cut interest rates next month.

“Crude oil prices inched higher during the early European session due to increased risks of a flare-up in confrontations in the Middle East,” said Milad Azar, market analyst at brokerage XTB.

“Optimism that potential U.S. interest rate cuts could spur economic growth and increase fuel consumption has also supported oil prices.”

Prices were also supported by worries over Iran’s potential response to the killing of the leader of the Palestinian militant group Hamas last month. Three senior Iranian officials have said that only a ceasefire deal in Gaza would hold Iran back from direct retaliation against Israel for the assassination.

“Geopolitical risk continues to hang over the oil market. It is still unclear how and if Iran will retaliate against Israel,” ING analysts said.

But oil inventory gains raised concerns of weaker demand, analysts at ANZ said in a client note. U.S. crude oil stockpiles rose by 1.4 million barrels in the week ended Aug. 9, compared with estimates for a 2.2 million barrel draw, building for the first time since late June. [EIA/S]

China’s factory output growth slowed in July while refinery output fell for a fourth month, underscoring the country’s spotty economic recovery, also limiting the market’s upside.