Oil Nears $66 on U.S. Inventories, Iraq Violence

U.S. crude stockpiles fall for third week; Islamic State attacks in Iraq support prices.

Oil rose towards $66 a barrel on Thursday, gaining for a second day, supported by expectations that a global supply glut is starting to ease and by fighting in Iraq.

The U.S. government's supply report on Wednesday showed crude inventories declined for a third week. Stockpiles had been at record levels due to excess supply, raising concern that storage capacity was getting tight.

Brent crude was up 80 cents at $65.83 as of 0937 GMT, after earlier falling as low as $64.83. U.S. crude  was up 69 cents at $59.67.

"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."

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. On Thursday, Iraqi forces said they thwarted a third attempt by the militants to break through their defensive lines east of the city overnight.


              

Such attacks raise concern about the stability of oil flows from Iraq - OPEC's second-largest producer - but the Islamic State insurgency has yet to affect its exports to world markets.

Limiting oil's rally, a private survey showed Chinese factory activity contracted for a third month in May and output shrank at the fastest rate in just over a year.

But the preliminary HSBC/Markit Purchasing Managers' Index prompted talk that more stimulus is needed for the world's second-largest economy - something that could support oil demand - and did not prevent Chinese equities hitting a seven-year high.

Brent has rallied sharply to a 2015 high of $69.63 on May 6 from a near six-year low close to $45 in January. Taking turns in dominating sentiment are concerns about abundant current supplies and the prospect of a tighter market down the road.

The price collapsed from $115 in June 2014 due to a supply glut, in a decline that deepened after the Organization of the Petroleum Exporting Countries dropped its long-standing policy of cutting output to support prices.

OPEC meets on June 5 and is expected to maintain its focus on defending market share.

By Alex Lawler