Solid Manufacturing Data Fuel Oil's Rally

Oil rose further on Tuesday on solid U.S. manufacturing data and a weaker dollar, building on gains sparked by expectations that output will suffer following reports of declining rig counts and cuts in capital expenditure.

Oil has risen more than 13 percent since Thursday after data showed the number of U.S. drilling rigs had fallen the most in a week in nearly 30 years. Some investors are betting a floor has formed under the market's seven-month-long rout.

Brent crude oil futures were up $1.13 cents at $55.88 a barrel as of 1430 GMT. U.S. WTI futures were at $50.60 a barrel, up $1.03 cents.

"The strong upside rally continues in the oil market... supported by a softer U.S. dollar and recent solid manufacturing PMI data which improved market sentiment," said Myrto Sokou, senior research analyst at Sucden Financial.

The U.S. manufacturing sector expanded in January at the same pace as in December, keeping demand for oil steady.

The dollar weakened on Tuesday by 0.5 percent against a basket of currencies, making dollar-priced commodities more attractive to buy.

BP announced it would cut capital expenditure by 13 percent to $20 billion in 2015, adding to cuts in investment in the sector and expectations of lower oil production. Last week, Chevron announced a 13 percent cut in capital expenditure to $35 billion.

BP Chief Executive Bob Dudley, remained bearish, however, when he said on Tuesday he expected U.S. oil output to rise until the summer of 2015 when it would flatten.

"The market is trying to find it's footing. But the fundamentals of production haven't changed. We're in for a minimum year and probably several years of lower prices," said Dudley.

Analysts at Morgan Stanley said the relationship between rig count and production can be deceptive.

"Headline rig count declines may look impressive, but as we look at the data, much of the drop in oil rig count has come in low yielding vertical or directional rigs, i.e. the low-hanging fruit," they said.

Two OPEC delegates, one from a Gulf producer, said they could not rule out oil prices dropping to as low as $30 to $35, due to weak demand combined with global refinery maintenance in the first and second quarters of 2015. (Additional reporting by Jacob Gronholdt-Pedersen and Henning Gloystein in Singapore; editing by William Hardy and David Evans)