By Deep Kaushik Vakil and Robert Harvey

LONDON (Reuters) -Oil futures hit a seven-week high on Thursday as fresh data on a cooling U.S. jobs market added to hopes that the Federal Reserve could still cut interest rates this year.

Also fuelling prices were worries of escalating conflict in the Middle East, with fears of supply disruption in the major oil-producing region.

futures were up 78 cents, or 0.9%, to $85.85 a barrel by 1349 GMT, having earlier hit $85.89, a high not seen since 1 May.

U.S. West Texas Intermediate (WTI) futures for July, which expire on Thursday, gained 70 cents, or 0.9%, to $82.27.

There was no WTI settlement on Wednesday because of a U.S. public holiday, which kept trading largely subdued. The more active August contract was up 60 cents at $81.31.

The number of Americans filing new claims for unemployment benefits fell last week.

Labour market momentum has ebbed in tandem with the overall economy as the Federal Reserve tries to tame inflation. With that pressure now subsiding, a rate cut this year remains on the table.

That could bolster oil prices, which have been dragged down this year by lacklustre global demand. A U.S. rate cut would make borrowing cheaper in the world’s largest economy, galvanising the appetite for oil as production picks up.

Oil prices are also likely to remain supported by a growing geopolitical risk premium driven by conflict in the Middle East, said ActivTrades analyst Ricardo Evangelista.

Israeli forces pounded areas in the central Gaza Strip overnight, while tanks deepened their advance into Rafah in the south.

However, expectations of an inventories build appear to be overshadowing fears of escalating geopolitical stress for now, said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Investors are awaiting the release of U.S. oil inventory data on Thursday, a day later than usual because of the Juneteenth holiday on Wednesday.

An industry report released on Tuesday showed that stocks rose by 2.264 million barrels in the week ended June 14 while gasoline inventories fell, market sources said, citing American Petroleum Institute figures.

A summer uptick in oil demand, refinery runs and ongoing weather risks added to extended production cuts by the OPEC+ producer group mean that “oil balances should tighten and inventories should begin to draw during the summer months”, JPMorgan commodities analysts wrote.

Investors also digested the Bank of England’s decision to keep its main interest rate unchanged at a 16-year high of 5.25% ahead of Britain’s national election on July 4.