July 1 (Bloomberg) -- Oil advanced before the release of a report predicted to show that U.S. crude supplies contracted for a fourth week, stoking optimism that fuel demand will recover as the recession abates.

The Energy Department will probably report today that crude-oil stockpiles dropped 2 million barrels last week, according to a Bloomberg survey. Yesterday the industry-funded American Petroleum Institute said crude supplies fell by 6.8 million barrels. OPEC raised output for a third month in June, straying further from its agreed quotas.

“It was an extremely huge stock draw,” said Hannes Loacker, a Raiffeisen Zentralbank Oesterreich analyst in Vienna. “If we get confirmation of that data in the Energy Department, that will help prices.”

Oil for August delivery gained as much as $1.51, or 2.2 percent, to $71.40 a barrel on the New York Mercantile Exchange, and was at $71.34 at 1:50 p.m. London time. Oil dropped from an eight-month high yesterday after U.S. consumer confidence declined in June.

The 11 members of the Organization of Petroleum Exporting Countries subject to output quotas boosted production 75,000 barrels a day to 25.86 million a day in June, according to a Bloomberg survey. The group has a target for 24.845 million barrels a day.

New York oil jumped 41 percent in the second quarter, the biggest since 1990 as rebounding world equity markets and a weaker dollar encouraged investors to buy crude as an alternative investment.

Bullish Surprise

“U.S. macro numbers have taken a turn for the worse so far this week,” said Edward Meir, an analyst with MF Global Ltd. in Connecticut. “Any bullish surprise in the inventory data has to be substantial, otherwise values will likely head lower. We say this in view of the fact the dollar remains firm.”

The Energy Department report, due at 10:30 a.m. in Washington, will probably show that gasoline supplies climbed by 2 million barrels, according to the Bloomberg survey. Stockpiles of distillate fuel, a category that includes heating oil and diesel, likely increased 1.5 million barrels.

The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

Oil-supply totals from the API and Energy Department moved in the same direction 76 percent of the time over the past four years, according to data compiled by Bloomberg.

Oil was also boosted by rising European equities.

Aided by Equities

European stocks rose, extending the Dow Jones Stoxx 600 Index’s best quarterly gain this decade. Marks & Spencer Group Plc reported its smallest quarterly sales decline in almost two years, and manufacturing in China rose a fourth straight month.

The Purchasing Managers’ Index increased to a seasonally adjusted 53.2 in June from 53.1 in May, the Federation of Logistics and Purchasing said today in Beijing. A reading above 50 indicates an expansion. China is the largest crude oil user after the U.S.

Brent crude oil for August settlement rose as much as $1.65, or 2.4 percent, to $70.95 a barrel on London’s ICE Futures Europe exchange. It was at $70.90 a barrel at 1:31 p.m. in London.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net

Last Updated: July 1, 2009 08:53 EDT