Oil jumps 3 percent, hits 2015 high on Yemen, supply concern

NEW YORK (Reuters) - Oil prices jumped 3 percent on Thursday to their highest levels of this year, after Saudi Arabia and its allies maintained a bombing blitz in Yemen that heightened concerns about the security of Middle East oil supplies.

Oil buyers also stoked the rally with bets that U.S. crude output will shrink further after two straight weeks of declines, traders and analysts said.

Warplanes from a Saudi-led coalition pounded Houthi militiamen and military bases in Yemen, residents said, two days after Riyadh announced it was ending the blitz.

"The Saudi escalation of its Yemen campaign is producing exactly the kind of geopolitical tensions oil is known to rally for," said Gene McGillian, senior analyst at Tradition Energy, an oil markets advisory in Stamford, Connecticut.

"You also have the assumption that U.S. production will continue to decline from cutbacks in oil rigs count and exploration expenditure, though I'm not too much of a believer in such improving fundamentals," he said.

The Bab el-Mandeb Strait on Yemen's southern coast controls access to the Red Sea, Suez Canal and the ports of western Saudi Arabia, the world's biggest crude exporter.

U.S. oil production notched its third weekly decline in four weeks, the U.S. Energy Information Administration said.

U.S. crude oil's front-month futures contract, June, was up $2 at $58.16 a barrel by 11:55 a.m. EDT. Its session high of $58.27 was a 2015 high.

June U.K. North Sea Brent, the global benchmark for oil, jumped $2.34 to $65.07 a barrel. Its session high was a 2015 peak of $65.13.

Oil prices have risen as much as $10 this month due to worries about Middle East supplies and signs of stronger global demand, particularly for automotive fuels.

But so far, world supplies of crude are still in a glut. Latest estimates put production by the Organization of the Petroleum Exporting Countries at almost 2 million barrels per day above demand for its oil in the first half.

U.S. government data on Wednesday showed domestic crude stockpiles rose by 5.3 million barrels last week, well above a forecast 2.9 million barrels, to a record 489 million barrels. [EIA/S]

It was the 15th straight weekly build for U.S. crude stocks and pushed U.S. commercial inventories almost 100 million barrels above their year-ago level.

Executives at an industry conference in Houston this week said the cost of drilling wells in the United States had fallen much faster than expected, allowing producers to work oilfields that just months ago looked uncompetitive.

(Additional reporting by Christopher Johnson in London and Himanshu Ojha in London and Jacob Gronholt-Pedersen in Singapore; Editing by Dale Hudson and William Hardy)

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