* Letter from Xi to Trump raises hopes for trade deal
* U.S.-China trade talks continue this week
* U.S. inventories interactive graphic: tmsnrt.rs/2XfuQqn (New throughout, updates prices, market activity and comments after President Xi letter)
By Collin Eaton
HOUSTON, May 9 (Reuters) - Brent oil futures settled slightly higher on Thursday, rebounding from a drop after U.S. President Donald Trump revived investor hopes that the United States might not raise tariffs on Chinese imports, a step that could hit economic growth and crimp oil demand.
The trade dispute between the world's two biggest economies and a sharp drop in global equity markets has hit oil prices, outweighing geopolitical tensions and supply cuts that have lowered global supplies from Latin America, Africa and the Middle East.
Brent settled 2 cents higher at $70.39 a barrel, rebounding from a session low of $69.40 a barrel. U.S. West Texas Intermediate (WTI) crude futures settled down 42 cents at $61.70 per barrel.
Prices bounced off session lows after Trump said he received a "beautiful letter" from Chinese President Xi Jinping. Trump quoted the letter as saying: "Let's work together let's see if we can get something done."
The letter fed investor hopes Washington and Beijing might clinch a trade deal, said Bob Yawger, director of energy futures at Mizuho in New York.
The trade row has dragged economic growth in Asia and a breakdown in Sino-American negotiations could call global crude demand forecasts into question, said John Kilduff, a partner at Again Capital Management LLC.
The U.S. Energy Information Administration expects global oil demand to rise by 1.4 million barrels per day (bpd) this year.
"It's why OPEC is being a bit stingy with barrels," Kilduff said, referring to output cuts by the Organization of Petroleum Exporting Countries and allies including Russia. "They don't want to step into that situation if the trade talks go off the rails."
OPEC's top producer Saudi Arabia has been reluctant to add barrels to global supply because it fears a price crash, even as the organization is unsure of global supplies for the second half of the year, OPEC sources said.
U.S. sanctions on Venezuela and Iran, and threats to oil supplies in Nigeria in Libya have supported oil prices, mitigating the impact of the trade dispute, analysts said. Brent and WTI have risen more than 30 percent so far this year.
"The supply uncertainty is what's holding the (U.S. oil) market above $60 a barrel," said Phillip Streible, senior market strategist at RJO Futures in Chicago. "The demand uncertainty is what has it in the red today. But we're holding pretty good."
Earlier this week, data showing a surprise drop in U.S. crude inventories also buoyed prices.
The U.S. tariffs on $200 billion of Chinese goods would rise to 25 percent without a deal on Friday. China has threatened to retaliate, triggering a flight to safety among investors.
Additional reporting by Shadia Nasralla in LONDON; Aaron Sheldrick in TOKYO and Jane Chung in SEOUL; Editing by David Gregorio and Susan Thomas