Oil rises above $65 on expectations global supply glut eases; Rally capped by China data

Thursday saw crude oil futures rising for a second day as the U.S. government report released Wednesday showed crude inventories declined for a third week. Fighting in Iraq remains in focus.

The U.S. government reported Wednesday that stockpiles had been at record levels due to excess supply, raising concern that storage capacity was getting tight.

Brent crude was up 23 cents at $65.26 as of 0828 GMT, after earlier falling as low as $64.83.

U.S. crude was up 22 cents at $59.20.

Christopher Bellew, senior broker at Jefferies Bache, said he sees prices moving up further from here on geopolitics towards $70, adding that Brent is supported by the threat Islamic State is posing in Iraq.

On Sunday Iraqi city of Ramadi fell to Islamic State in the most significant setback for Iraqi security forces in nearly a year. On Thursday, Iraqi forces said they blocked a third attempt by the militants to break through their defensive lines east of the city overnight.

These tensions raise concerns about the stability of oil flows from Iraq - OPEC's second-largest producer - however, those attacks have yet to affect its exports to world markets, says Reuters.

Oil gains were capped after private survey showed that in May Chinese factory activity contracted for a third month, and output decreased at the fastest rate in just over a year.

But the preliminary HSBC/Markit Purchasing Managers' Index drove speculation that an incentive 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.