Oil gains on driving season demand, China stimulus hopes

Reuters

Oil prices rose by around $2 on Tuesday, topping $64 a barrel as higher seasonal demand in developed economies and expectations of falling U.S. shale production reduced the impact of a large global supply overhang.

Brent for July delivery was up $1.95 at $64.64 a barrel at 1324 GMT, having settled down 62 cents in the previous session.

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Front-month U.S. crude climbed $1.67 to $59.81 a barrel, after falling 99 cents in the previous session.

Demand for oil tends to increase in the summer months as drivers take to the roads for holidays in Europe and the United States. This has helped to lessen the impact of a growing glut in supply that has led to tankers storing oil at sea.

"There is currently seasonal demand for oil, so there is less of a build in crude oil stocks," said Olivier Jakob at Petromatrix in Zug, Switzerland. "But there is still too much oil for the rally to take hold."

Hopes of more economic stimulus in China after disappointing data from the world's second-biggest economy also provided some support for oil prices.

China's consumer inflation weakened more than expected to 1.2 percent year-on-year in May, raising concerns about growing deflationary pressures as the economy cools. Its producer prices fell for the 38th consecutive month.

The outlook for strong supply looks entrenched, with OPEC on Friday agreeing to continue unconstrained output and Iran and Iraq potentially boosting production.

Saudi Arabia's oil ministry said on Tuesday that the rise in its oil production over the past three months to its highest on record was a result of increased global demand and the needs of its customers, and was not designed to compensate for lower oil prices.

A likely fall in shale oil production in the United States also supported prices.

One New York-based trader said OPEC's decision last week to keep supply unchanged at more than 30 million barrels per day was having the intended consequence of limiting competition from the United States.

Oil production declines from the largest U.S. shale plays are forecast to deepen for a third consecutive month in July even as rig productivity remains high, monthly drilling data from the U.S. Energy Information Administration showed on Monday.

However, some analysts said that these falls in production will not make a significant dent in supply.

"We feel that at best, even with monthly declines in U.S. production, we will only be chipping away at the massive crude inventory mountain in the U.S.," Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, told the Reuters Global Oil Forum.

Investors were awaiting weekly data on Tuesday from the American Petroleum Institute for more evidence that U.S. stockpiles were falling.

Data due on Wednesday from the Energy Information Administration (EIA) is expected to show U.S. commercial crude oil stocks fell for a sixth straight week in the week ended June 5, a preliminary Reuters survey showed on Monday. (Additional reporting by Meeyoung Cho in Seoul; Editing by Jason Neely and Susan Fenton)