By Arathy Somasekhar

HOUSTON (Reuters) -U.S. crude prices settled below $95 a barrel for the first time since April in choppy trading on Friday after the European Union said it would allow Russian state-owned companies to ship oil to third countries under an adjustment of sanctions agreed by member states this week.

U.S. West Texas Intermediate crude (WTI) settled $1.65, or 1.7%, lower at $94.70 a barrel, while Brent crude futures fell 66 cents, or 0.6%, to $103.20.

WTI closed lower for the third straight week, pummelled over the past two sessions after data showed that U.S. gasoline demand had dropped nearly 8% from a year earlier in the midst of the peak summer driving season, hit by record prices at the pump.

In contrast, signs of strong demand in Asia propped up the Brent benchmark, which settled higher for the first time in six weeks.

Trading in oil futures has been volatile in recent weeks as traders try to reconcile possibilities of further interest rate hikes that could cut demand against tight supply from the loss of Russian barrels.

Russian state-owned companies Rosneft and Gazprom will be able to ship oil to third countries in a bid to limit the risks to global energy security.

Under tweaks to sanctions on Russia that came into force on Friday payments related to purchases of Russian seaborne crude oil by EU companies would not be banned.

"Short term that definitely is a negative headline that probably gave us a little bit of a sell-off here," said Phil Flynn, an analyst at Price Futures group.

The EU announcement comes after Russian Central Bank Governor Elvira Nabiullina said it will not supply crude to countries that decide to impose a price cap on its oil and instead redirect it to countries which are ready to "cooperate" with Russia.

"Perceptions are growing that the U.S. and EU will implement price caps on Russian oil by year end," said Dennis Kissler, senior vice president of trading at BOK Financial.

"Past history shows that government-induced price caps on commodities are usually short lived and can result in exaggerated prices soon after," he added.

Prices, however, were held back by worries of interest rate hikes that could slash demand and the resumption of some Libyan crude oil output.

Libya's oil production is at more than 800,000 barrels per day (bpd) and will reach 1.2 million bpd by next month, the Libyan oil ministry said.

Iraq has the capacity to increase its oil production by 200,000 bpd this year if asked, an executive of Iraq's Basra Oil Co said.