Oil up sharply, posts first monthly gain since June

NEW YORK (Reuters) - Crude oil rose sharply on Friday as Brent and U.S. futures posted their first monthly gains since June, supported by an improving demand outlook and supply outages.

On its way to contract expiration, front-month March New York ultra-low sulfur diesel (ULSD) gained more than 7 percent in volatile trading, and the 36 percent February increase was the biggest percentage monthly rise in 15 years.

Brent crude rose $2.53 to $62.58 a barrel. The 18 percent gain for February was the biggest monthly percentage rise since May 2009.

U.S. crude rose $1.59 to settle at $49.76 a barrel, managing a 3.1 percent February gain.

Both Brent and U.S. futures briefly pared gains after data from Baker Hughes Inc showed its U.S. oil drilling rig count fell only 33 to 986 this week, after a decline of only 37 last week.

The U.S. crude contract's gains have been curbed by rising crude oil inventories in the United States, up 8.4 million barrels last week, according to government data. [EIA/S]

Both contracts have been supported by signs that lower prices are starting to reduce investment in non-OPEC production, even as the U.S. rig count slide slows.

Brent's more pronounced February gains have been fueled by disruptions to production and exports from Libya and Iraq.

"The main event this week has been the widening of the spread between Brent and WTI (U.S. crude)," said Ole Hansen, senior commodity strategist at Saxo Bank.

The spread between Brent and U.S. crude was as wide as $13 a barrel on Friday, the highest Brent premium since January 2014.

Brent has also received support from strong U.S. refined products futures approaching expiration for March contracts.

"Cold weather and refinery problems and tight supplies on the East Coast have helped make the ULSD contract the most sensitive part of the oil sector," said Robert Yawger, director for energy futures at Mizuho Securities USA in New York.

March ULSD rose 16.31 cents to settle at $2.2989 a gallon, after reaching $2.3325, a 2015 peak and the highest since November.

March's premium to April ULSD swung from 22.35 cents a gallon to 37.69 cents on Friday.

March RBOB gasoline rose 6 cents to settle at $1.7676 a gallon, going off the board above RBOB's 100-day moving average of $1.7658.

Both products posted the first monthly gains since June.

(Additional reporting by Claire Milhench in London and Jane Xie in Singapore; editing by Dale Hudson, Marguerita Choy and Diane Craft)

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