Oil rises towards $59, supported by U.S. drilling slowdown

LONDON (Reuters) - Brent crude rose above $58 a barrel on Monday as a slowdown in U.S. drilling continued to support prices, offsetting a drop in Chinese imports.

Front-month Brent futures were up 76 cents at $58.63 a barrel by 1207 GMT, having earlier touched $59.54. U.S. crude was up 90 cents at $52.54 a barrel, after hitting $53.10.

The number of rigs drilling for oil in the United States fell by 42 last week to 760, the largest decline in a month, oil services firm Baker Hughes said in its closely watched survey on Friday.

"The U.S. rig count once again focused people's minds on the imminent reduction of production," said Ole Hansen, head of commodity strategy at Saxo Bank.

"The market is choosing to not focus on the ample supply we have at the moment."

Prices jumped by more than a dollar between 0715 GMT and 0810 GMT on Monday before dropping back under $59. Analysts said this was likely due to traders covering short positions.

Gains were capped by bearish news from top importer China, which imported 6.3 million barrels per day (bpd) in March, 5.2 percent down on February.

Speculators in Brent futures and options raised net long positions to the highest level since July, 2014 in the week to April 7, data from InterContinental Exchange showed.

This followed a rise in net long positions of U.S. crude futures and options by 52 million barrels, their biggest weekly rise since 2011.

Reuters data shows open interest in WTI strike options for $60, $70, $80 and $90 per barrel on NYMEX has risen steadily since January, showing many traders are betting on rising prices. Volumes for $100-a-barrel options have risen by almost 20 percent.

But analysts at Germany's Commerzbank were unconvinced by the investors' bets.

"We believe the optimism among investors vis-à-vis oil is exaggerated," they said in a note on Monday.

"This has given rise to considerable correction potential which could lead at any time to a sharp fall in prices."

While many traders speculate that prices may not fall much further, analysts said a big rally was also unlikely.

"Although there are tentative signs of demand improving and rig counts fell to the lowest level since 2010, an ongoing global market surplus ? driven by swelling U.S. inventories and Saudi Arabian output to record high levels ? should limit any potential rally," ANZ said in a note.

(Additional reporting by Henning Gloystein in Singapore; Editing by Dale Hudson, Louise Heavens and David Evans)