TOKYO: Oil prices held mostly steady on Thursday as a smaller-than-expected draw in U.S. crude inventories and continued worries over China demand countered supply disruptions out of Libya.

Brent crude futures were down 1 cent, or 0.01%, at $78.64 a barrel at 0043 GMT, while U.S. West Texas Intermediate crude futures were up 8 cents, or 0.1%, to $74.60.

Both contracts lost over 1% on Wednesday, after data showed that U.S. crude inventories dropped by 846,000 barrels to 425.2 million barrels last week, less than analyst expectations in a Reuters poll for a draw of 2.3 million barrels.

Losses were limited, however, by worries over disruption to supplies out of Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC).

A number of oil fields in Libya have halted production amid a fight for control of the country's central bank, with one consulting firm estimating output disruptions of between 900,000 and 1 million barrels per day (bpd) for several weeks.

In July, Libya produced about 1.18 million bpd.

"Supply side issues continue to hang over the market. Libyan output has more than halved this week amid a political dispute," ANZ Research said in a note. "Output is at risk of falling further as more fields close."

The expectation that the U.S. central bank will start cutting interest rates next month also supported oil prices, with Federal Reserve Bank of Atlanta President Raphael Bostic saying that with inflation down farther and unemployment up more than anticipated, it may be time for cuts.

Lower interest rates decrease the cost of borrowing, and that can boost economic activity and increase demand for oil. (Reporting by Katya Golubkova; Editing by Tom Hogue)