May 13, 2015 07:21 AM EDT

Oil extends gains after U.S. stockpiles drop for second week

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]

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

Brent for June LCOc1 was up 55 cents at $67.41 a barrel by 0905 GMT (5.05 a.m. EDT). Brent hit a high of $69.63 on May 6, its strongest since December. U.S. crude CLc1 was up 70 cents at $61.45 after reaching a 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.

But 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. [IEA/M]

"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, which tends to focus on the U.S. 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]

A modest drop in the U.S. dollar against a basket of major currencies also supported oil prices. Dollar-denominated commodities become more affordable to holders of other currencies when the greenback weakens. [FRX/]

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