Oil prices jumped more than 2% on Thursday, giving Brent its biggest rally in more than a week, as draws reported in the Cushing delivery point for U.S. crude futures boosted optimism that a supply glut was easing.
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Fighting in Iraq that raised worries about the security of Middle East oil shipments also boosted the market.
The dollar's retreat took some pressure off crude prices as well. The greenback snapped a broad three-day run-up and fell against the euro for the first time in a week, making dollar-denominated commodities more affordable to holders of other currencies.
Inventories of U.S. crude in Cushing, Oklahoma fell by almost 740,000 barrels between Friday and Tuesday, trade sources said, citing a report by market intelligence firm Genscape.
The report added to the fervor of oil bulls, already inspired by Wednesday's U.S. government data showing the third straight weekly decline in crude stockpiles across the United States.
"All these drawdowns indicate the supply glut we've been having is easing, so not surprisingly more people are going long oil and those who aren't are covering shorts," said Phil Flynn, analyst at the Price Futures Group in Chicago.
U.S. crude settled up $1.74, or nearly 3 percent, at $60.72 a barrel.
Brent, the more widely used benchmark, settled at $66.54, up $1.51, or 2.3 percent.
The last time Brent rose by more than 2 percent in a day was on May 12.
In Iraq, the city of Ramadi fell to Islamic State on Sunday in the most significant setback for Iraqi security forces in nearly a year.
"Brent is getting a bit of impetus from the threat Islamic State is posing in Iraq," said Christopher Bellew, senior broker at Jefferies Bache. "I can see prices moving up further from here on geopolitics towards $70."
Brent has rallied to above $66 from a near six-year low of about $45 in January.
Brent had peaked at $115 in June before halving by the year-end, after the Organization of the Petroleum Exporting Countries dropped its policy of cutting output to support prices. OPEC meets on June 5 and is not expected to alter its policy, in the interest of defending market share.
U.S. crude inventories are about 20 percent higher than year-ago levels, suggesting vulnerability for prices to move lower, analysts at Commerzbank said in a report.
"We continue to envisage downside risks," Commerzbank said.
(By Barani Krishnan; Additional reporting by Alex Lawler in London and Henning Gloystein and Florence Tan in Singapore; Editing by William Hardy, Ahmed Aboulenein, Andrea Ricci and Marguerita Choy)