Oil drifts higher

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NEW YORK (Reuters) -- Oil rose Monday as optimism about a potential global economic recovery lifted markets and expectations of a turnaround in fuel demand.

World markets extended gains from last week on strong corporate earnings and news of a rescue package for troubled U.S. lender CIT (CIT, Fortune 500).

U.S. crude traded up 42 cents to settle at $63.98, after rising more than 6% last week.

Further support came after an index gauging the U.S. economy's prospects increased for a third straight month in June, suggesting the recession was drawing to a close.

The index of leading economic indicators, which is supposed to forecast economic trends six to nine months out, rose 0.7% in June following a revised 1.3% gain in May, the New York-based Conference Board said.

"I think it's mostly continued follow-through after last week's rally. Economic optimism fueling stronger equities and the weaker dollar are supporting commodity markets," said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc.

A survey of economists showed the recession's grip on top oil consumer the United States appeared to be easing but had not yet ended.

The dollar hit a six-week low, also supporting commodities denominated in the greenback, as investors waded back into riskier assets and higher-yielding currencies.

Algeria's oil minister said OPEC will need to cut output again when it meets again in September if there is not enough demand for its crude.

"I think OPEC's objective is to satisfy demand in the world market and to meet any real demand," Chakib Khelil told reporters in Milan.

"It will cut only if demand is destroyed or it disappears in the market. If we see demand does not exist in the market in September, we will have to cut."

The producer group agreed to a series of cuts last year to lop 4.2 million barrels per day (bpd) of output from global markets as part of a bid to lift flagging oil prices.

The global recessing has battered fuel demand, knocking crude from record highs near $150 a barrel in July 2008 to below $33 a barrel in December. Hopes an end to the recession will spark consumption have pushed crude higher this year.

Data from the U.S. Department of Transportation showed Americans drove 0.1% more miles in May compared with year-ago levels, the second straight monthly increase.

A Reuters poll of analysts released ahead of weekly U.S. inventory data forecast crude stockpiles fell by 1.8 million barrels in the week to July 17, which would mark the seventh straight week of declines. Distillate and gasoline stocks were forecast up.

The U.S. Department of Energy will release its data on Wednesday, with data from the American Petroleum Institute due out late Tuesday.