UPDATE 3-Oil steadies around $108; focus on Ukraine, U.S. stockpiles

* Fighting in Ukraine, Gaza adds to oil risk premium * EU foreign ministers to discuss Russian sanctions in Brussels * U.S. crude stockpiles expected to fall 2.8 million barrels on week * Coming up: U.S. API data due at 2030 GMT * Brent/WTI spread hits 11-month high (Updates, prices, quotes, adds Brent/WTI spreads) By Rowena Caine LONDON, July 22 (Reuters) - Brent crude steadied around $108 a barrel on Tuesday, supported by expectations of large draws in U.S. oil stockpiles and escalating geopolitical tension over Ukraine causing European foreign ministers to consider further sanctions on Russia. European foreign ministers meet in Brussels on Tuesday and Britain, Germany and France may be prepared to increase sanctions against Russia, the world's top crude producer. "The talks about potential new sanctions against Russia can add risk premium to the oil price," said Olivier Jakob, an analyst at Petromatrix in Zug, Switzerland. Brent crude was up 15 cents at $107.83 a barrel at 0826 GMT, while U.S. oil for August delivery traded 51 cents higher at $105.10 a barrel. The U.S. front-month contract expires on Tuesday. The European benchmark has remained in a tight range since surging nearly 2 percent last Thursday after news that a Malaysia Airlines jet had been shot down over eastern Ukraine. "There is some push for the EU to move into the type of sanctions that the United States is imposing on companies that do not have a direct link with the events in Ukraine," said Jakob. "That can have an impact on oil companies." Reports that Ukrainian forces were moving into the eastern city of Donetsk added to concerns that the conflict may escalate. In Libya, state-run National Oil Corp (NOC) reached a deal with security guards to end a protest at eastern Brega oil port, which would allow the terminal to reopen on Tuesday. Reopening the oilfield would further boost Libya's oil production which reached 555,000 barrels per day last week. "The expectation that Libya supplies will return has put some pressure on Brent, but there is still a lot of fighting," said Jakob. The conflict in Gaza fuelled worries that tensions may spread across the Middle East, as Israeli jets, tanks and artillery targeted the territory and the death toll from the two-week conflict topped 500. OIL STOCKS SEEN LOWER Oil investors will turn their focus later to weekly U.S. commercial crude oil inventories, which are likely to have dropped 2.8 million barrels in the week to July 18, according to a preliminary Reuters survey of four analysts. The survey was taken ahead of weekly inventory reports from industry group the American Petroleum Institute (API) due at 2030 GMT and from the U.S. Department of Energy's Energy Information Administration (EIA) due on Wednesday. Domestic crude stocks fell by 7.5 million barrels the previous week, the biggest draw since January, caused by a sharp increase in refinery activity. Refiners in the United States are bidding furiously for crude in the opaque physical market, paying the highest premiums in months for coastal grades like Light Louisiana Sweet and Mars . The buying has turned the cash crude market upside down, with WTI crude at the delivery point of Cushing, Oklahoma, trading at a discount of under $1 a barrel to cash Brent-Forties-Oseberg-Ekofisk crude , Reuters data showed. Investors will also be watching monthly U.S. inflation data due at 1230 GMT, followed by home sales at 1300 GMT. With WTI futures seeing stronger price gains than Brent over the past week, the spread between Brent and U.S. crude has dropped to $2.79 a barrel, an 11-month low. (Additional reporting by Henning Gloystein in London and Jacob Gronholt-Pedersen in Singapore; editing by Jason Neely)