May 17, 2016 / 3:12 PM / a year ago

UPDATE 9-U.S. crude prices hits 7-month high as inventory drop seen

* U.S. crude stockpiles expected to fall second week in row

* Canada wildfires rage anew, causing oil firms more woes

* Libya deal signals first step in output resumption there

* Bank of America, UBS less optimistic on oil rally

* Coming up: EIA inventory data at 1430 GMT on Wednesday (Adds API data and market reaction in post-settlement trade)

By Barani Krishnan

NEW YORK, May 17 (Reuters) - Oil prices rose for a second straight day on Tuesday, with U.S. futures hitting seven-month highs, on expectations of a drawdown in U.S. crude stockpiles and a new wildfire threat on Canadian oil supplies.

Concerns about the potential for higher Libyan output and apprehension that the market was reaching overbought levels initially restrained the rally.

Prices rose after a Reuters poll of oil analysts forecast U.S. crude inventories likely fell 2.8 million barrels last week, declining for a second straight week.

Sentiment was also boosted by reports of fresh trouble for Canadian energy producers as a massive wildfire around the oil sands hub of Fort McMurray, Alberta, shifted north, forcing the evacuation of about 4,000 people from work camps.

Prices softened after a deal struck in Vienna between rival Libyan oil factions indicated the first step towards restoring crude production mostly shut in the North African country. The Libyan agreement followed Monday’s news of potential reopening for some shuttered Nigerian output.

But in post-settlement trade, U.S. crude’s West Texas Intermediate (WTI) futures rallied anew, reaching mid-October highs, as bulls pushed closer to the $50-a-barrel target.

WTI finished up 59 cents, or 1 percent, at $48.31 a barrel. The session high was $48.42 while the post-settlement peak was $48.76.

Brent crude closed up 31 cents at $49.28, hitting a six-month high of $49.58. In after-hours trade, it got to $49.75.

The market retraced some of its post-settlement gains after industry group the American Petroleum Institute reported a U.S. crude drawdown of 1.14 million barrels for last week - less than half the level forecast in the Reuters poll. The U.S. Energy Information Administration (EIA) will issue official inventory data at 10:30 a.m. (1430 GMT) on Wednesday.

“All in all, this feels like a complex that still possess enough bullish momentum to boost nearby WTI values to above the $50 mark, while bolstering July Brent to as high as the $53-54 area,” said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.

Notwithstanding Tuesday’s rally, some prominent banks in commodities said oil prices looked overstretched. Reuters data showed the Relative Strength Indicator for Brent and WTI at 66 and 69, respectively, near the technically overbought level of 70.

Bank of America Merrill Lynch (BAM) reiterated an end of third-quarter target of $39 for WTI, citing seasonal weakness from refinery maintenance.

Switzerland’s UBS raised its longer-term upward target for Brent to $55 from $47, but a forecast a near-bottom as low as $36.

Additional reporting by Alex Lawler in LONDON; Editing by Marguerita Choy

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