Aug. 3 (Bloomberg) -- Crude oil and gasoline surged to seven-week highs as increasing industrial activity bolstered optimism that fuel consumption will rebound.

Oil gained 3.1 percent after reports showed that U.S. manufacturing shrank at the slowest pace in 11 months and factory output in China advanced to the highest level in almost a year. The Standard & Poor’s 500 Index climbed above 1,000 for the first time since November, also boosting optimism that raw- material demand and prices will increase.

“Good financials and better economic prospects are leading to exuberance in commodity markets,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts.

Crude oil for September delivery rose $2.13 to $71.58 a barrel at 2:46 p.m. on the New York Mercantile Exchange, the highest settlement since June 12. Prices are up 60 percent this year and have dropped 51 percent from a record $147.27 reached on July 11, 2008.

Gasoline for September delivery increased 5.67 cents, or 2.8 percent, to end the session at $2.0693 a gallon in New York. It was the highest settlement since June 16.

Oil may rise more than other commodities as demand rebounds, said Nouriel Roubini, the New York University economist who predicted the credit crisis.

“As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices, especially next year,” Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia.

Equity Gain

The S&P 500 increased 1.4 percent to 1,000.96 at 3:22 p.m. in New York, after reaching 1,003.61, the highest since Nov. 4. The Dow Jones Industrial Average rallied 1.1 percent to 9,274.47.

“We are in the midst of a rally that’s probably been created by economic news,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “It looks like the bleeding has stopped, but we don’t know yet if the economy will pick up or limp along.”

The Institute for Supply Management reported today that its U.S. manufacturing index climbed to 48.9 last month from 44.8 in June. It was the highest since August 2008. The index was projected to increase to 46.5, according to a Bloomberg News survey of economists. Readings below 50 signal contraction.

China’s official Purchasing Managers’ Index rose for a fifth month to a seasonally adjusted 53.3 in July from 53.2 in June, the Federation of Logistics and Purchasing said Aug. 1. A survey today by CLSA Asia-Pacific markets showed manufacturing rose to a one-year high as stimulus spending stoked domestic demand. China accounts for about 45 percent of Asia’s oil use.

Brent Oil

Brent crude oil for September settlement gained $1.85, or 2.6 percent, to $73.55 a barrel on London’s ICE Futures Europe exchange. It was the highest closing price since Oct. 14.

The Organization of Petroleum Exporting Countries increased oil output for a fourth month in July, with quota compliance slipping as some members took advantage of strong prices, a Bloomberg News survey showed.

OPEC oil output averaged 28.39 million barrels a day last month, up 45,000 from June, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 26.035 million barrels a day, 1.19 million more than their target.

“We are trading in a wide range right now,” Emerson said. “I am sure that we won’t see $147.27 again anytime soon because of OPEC spare capacity and the demand outlook.”

OPEC members have 6.11 million barrels a day of spare production capacity, according to Bloomberg News figures.

Demand Projections

The International Energy Agency, OPEC and U.S. Energy Department forecast in reports last month that global oil consumption will decline by more than 1.5 million barrels a day this year, the most since the early 1980s.

“Investors are more interested in the macro-economic picture than supply and demand right now,” said Phil Flynn, vice president of research at PFGBest, a Chicago-based brokerage. “The rise in prices is counterintuitive because of the poor supply and demand picture.”

U.S. crude-oil inventories increased 1 million barrels last week, according to the median of 11 estimates by analysts in a Bloomberg News survey. Stockpiles climbed 5.15 million barrels in the week ended July 24, the biggest gain since April, an Energy Department report on July 29 showed.

The dollar dropped to the lowest level this year versus the euro, bolstering the appeal of commodities to investors looking for an inflation hedge. The U.S. currency fell 1 percent to $1.4404 per euro from $1.4257 on July 31. It touched $1.4445, the weakest since Dec. 18.

Commodity Rally

The Reuters/Jefferies CRB Index of 19 raw materials climbed 3.4 percent to 266.28, the highest since Nov. 5.

Crude volume in electronic trading on the Nymex was 594,131 contracts as of 3:05 p.m. in New York. Volume totaled 712,109 contracts on July 31, the highest since May 7 and is 38 percent above the average over the past three months. Open interest was 1.19 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: August 3, 2009 15:58 EDT