LONDON - Oil extended gains above $65 (U.S.) a barrel Friday to reach a fresh six-month high after the U.S. reported a fall in oil inventories and further signs of economic improvement.

Benchmark crude for July delivery was up 67 cents to $65.75 a barrel by late morning in Europe in electronic trading on the New York Mercantile Exchange. On Thursday, the contract rose $1.63 to settle at $65.08, a six-month high and almost double the lows reached in March, when it fell below $35 a barrel.

The Energy Department's Energy Information Administration on Thursday said U.S. oil supplies dropped unexpectedly by 5.4 million barrels last week. Though crude inventories remain near 19-year highs, it was the third week in a row that supplies have fallen.

Investors were also cheered by signs the U.S. recession may be bottoming out. The government reported Thursday that demand for big-ticket manufactured goods in April had its biggest jump in 16 months. It was the second increase in the past three months and came after separate data showed the number of newly laid-off people requesting jobless benefits fell last week.

"We've got a lot more optimism about the economic outlook than we did," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "The market is factoring in a recovery in demand by the end of the year."

"But there's no real evidence that demand is picking up at this point."

The Organization of Petroleum Exporting Countries said Thursday at a meeting in Vienna that it will keep output levels unchanged. OPEC announced production cuts of 4.2 million barrels a day between September and January, but has kept output steady since then.

"The fragile status of the world economy was given as the main reason for the decision," analysts at JBC Energy wrote in a report. "However, OPEC's communique also pointed out that supply is still exceeding demand with oil inventories around the world close to record highs."

The JBC analysts say that because supply remains so high, another OPEC production cut is likely, possibly at the next meeting in September.

In other Nymex trading, gasoline for June delivery rose 1.28 cents to $1.92 a gallon and heating oil gained 1.02 cents to $1.61 a gallon. Natural gas for June delivery was up 1.9 cents at $3.98 per 1,000 cubic feet.

In London, Brent prices rose 76 cents to $65.15 a barrel on the ICE Futures exchange.