Oil extends gains after U.S. fuel stocks drop

LONDON (Reuters) - Brent crude oil rose above $67 a barrel towards five-month highs on Wednesday after U.S. crude stockpiles fell for a second straight week, suggesting that the world's biggest oil market is rebalancing.

U.S. crude, gasoline and distillate stockpiles all fell last week, the American Petroleum Institute said on Tuesday, ending months of builds that have lifted stocks to record highs.[API/S]

Prices also gained some lift after the dollar index <.DXY> plunged to a three-month low, following weak retail sales data for April.

Dollar-traded commodities such as oil benefit from a weaker U.S. unit as it makes them cheaper for holders of other currencies.

"Any recent dollar weakness is very supportive for the market," said Myrto Sokou, senior analyst at Sucden Financial.

Brent for June was up 59 cents at $67.45 a barrel by 1328 GMT. Brent hit a high of $69.63 on May 6, its strongest since December. U.S. crude was up 77 cents at $61.52 after reaching an earlier high of $61.83.

U.S. crude rose 2.5 percent and Brent 3 percent on Tuesday, underpinned by a weaker dollar and tensions in the Middle East.

Oil shrugged off a bearish report from the International Energy Agency (IEA), which said global supplies increased, outpacing small rises in oil demand. [IEA/M]

Many analysts, including the IEA, say that global oil market supply is rising as members of the Organization of the Petroleum Exporting Countries (OPEC) pump record levels in a battle for market share.

"Despite tentatively bullish signals in the United States, and barring any unforeseen disruption elsewhere, the market's short-term fundamentals still look relatively loose," said the IEA, which coordinates energy policies of industrial nations.

Global oil production exceeds demand by about 2 million barrels per day (bpd), or more than 2 percent.

The IEA cut its estimate of demand for OPEC oil this year by 300,000 bpd at the same time as raising its forecast for non-OPEC crude supply by 200,000 bpd.

But the oil market is still more concerned by evidence of a sharp slowdown in U.S. production, particularly of shale oil.

The U.S. government has cut its 2015 forecast for crude output growth to 530,000 bpd from 550,000 bpd and 2016 growth to 20,000 bpd from 80,000 bpd.[EIA/M]

"Lower oil prices are already showing signs of demand stimulation, especially in transportation fuels," Morgan Stanley analysts said in a note.

OPEC on Tuesday raised its 2015 global oil demand forecast to 1.18 million bpd, above a previous estimate of 1.17 million bpd. [OPEC/M]

(Additional reporting by Florence Tan in Singapore; Editing by David Goodman and William Hardy)

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