Crude Oil Trades Near $68 After Rising on Demand Recovery Signs

June 2 (Bloomberg) -- Crude oil traded near $68 a barrel after rising to the highest level since November yesterday as China’s manufacturing expanded and U.S. industrial output shrank less than forecast, signaling that fuel demand may increase.

Oil gained as much as 3.6 percent yesterday and equities rallied as the Institute for Supply Management’s U.S. factory index strengthened to 42.8 from 40.1 in April and after China’s Purchasing Manager’s Index showed manufacturing in May climbed for a third month. A government report tomorrow will probably show that U.S. oil inventories dropped for a fourth week.

“The Chinese and ISM manufacturing numbers are very bullish for oil demand,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “Crude oil supplies are finally falling. This trend has also been very supportive.”

Crude oil for July delivery fell 68 cents to $67.90 a barrel on the on the New York Mercantile Exchange at 9:03 a.m. in Sydney. Yesterday, oil advanced $2.27, or 3.4 percent, to $68.58, the highest settlement since Nov. 4. Prices are up 52 percent this year.

The Standard & Poor’s 500 Index increased 2.6 percent to 942.87, its highest close since November. The Dow Jones Industrial Average climbed 2.6 percent to 8,721.44.

Economists expected the ISM’s U.S. manufacturing index to climb to 42.3, according to the median of responses in a Bloomberg News survey. Readings of less than 50 on the Tempe, Arizona-based group’s gauge signal a contraction.

U.S. Inventories

The U.S. and China are the biggest oil-consuming countries, responsible for 33 percent of global demand in 2007, according to BP Plc, which publishes its BP Annual Statistical Review of World Energy each June.

U.S. crude-oil stockpiles probably dropped 1.75 million barrels in the week ended May 29, according to the median of eight estimates by analysts before tomorrow’s Energy Department report.

“We’re certainly on our way to $70, if not $75,” said Stephen Schork, president of Schork Group Inc. of Villanova, Pennsylvania. “That seems to be the number everyone is talking about. Given the technical momentum in this market, you cannot bet against it and step in front of this train.”

Technical traders watch for patterns on charts for clues to price direction, and may sell or buy based on those signals.

Oil’s rally may reach $78 a barrel should prices close above their 200-day moving average, according to technical analysis by PVM Oil Associates Ltd.

Weaker Dollar

The July crude contract rose to its 200-day mean on May 29, a signal that prices may keep rising, PVM said in a report today. If the contract settles above the rolling average, currently around $66.39 a barrel, oil may proceed to $78.40, the broker said.

The dollar traded at $1.4163 per euro at 6:10 a.m. in Tokyo. It touched $1.4246 yesterday, the weakest level since Dec. 29.

BNP Paribas raised its West Texas Intermediate crude-oil forecast for 2010 by $12 a barrel, to an average of $75, according to a report today by analyst Harry Tchilinguirian in London. The West Texas grade is the U.S. benchmark and is traded in New York.

“Investors are hopeful that the economy will be buoyant during the second half of the year, which will lead to increased crude-oil demand,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There are also hopes for a strong driving season.”

American Vacations

The peak U.S. gasoline consumption period lasts from late May’s Memorial Day holiday until Labor Day in early September, as Americans take to the highways for vacations.

Gasoline for July delivery rose 2.9 cents, or 1.5 percent, to end the session at $1.9243 a gallon in New York, the highest settlement since Oct. 9.

“As we get into the $70 to $75 range, we’re going to be talking plus-$3 gasoline by the end of the summer,” Schork said. “If you’re going to tell me plus-$3 gasoline is sustainable in this economy, then kudos to you. I just don’t believe it.”

The Organization of Petroleum Exporting Countries increased oil output by 1.5 percent in May, the biggest gain since October 2007, as members took advantage of higher prices, a Bloomberg News survey showed.

Oil production averaged 28.15 million barrels a day last month, up 405,000 from April, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 25.76 million barrels a day, 915,000 more than their target.

Brent crude for July settlement rose $2.45, or 3.7 percent, to end yesterday’s session at $67.97 a barrel on London’s ICE Futures Europe exchange. It was the highest settlement since Oct. 21.