Oil rose more than 2 percent to a seven-month high on Monday, extending its biggest monthly gain in a decade due to rallying stock markets and sustained expectations for a global economic recovery.

U.S. stocks rose, following gains in Europe and Asia driven by data showing China's manufacturing continued to expand moderately in May. The dollar weakened, boosting investor demand for oil and commodities.

It's the dollar and equities, said Christopher Bellew, a broker at Bache Commodities. It's maybe not so surprising if there is a chance of seeing some economic recovery and increased demand for oil.

U.S. crude was $1.44 higher at $67.75 by 1400 GMT having climbed as high as $68.29. Brent crude rose $1.60 to $67.12. The market is still down sharply from a record high over $147 reached last year.

China's manufacturing sector continued to expand moderately in May as new export orders improved, two surveys showed on Monday, adding to tentative signs the world's third-largest economy was stabilizing.

Oil rallied by 30 percent in May to its highest since early last November, giving OPEC enough hope about the outlook that it agreed to maintain production at last week's meeting.

INVENTORIES

At the same time, OPEC is unlikely to move quickly to curtail the rally. At the weekend Saudi Oil Minister Ali al-Naimi said OPEC would wait until crude inventories fall to around 53 days of forward cover before considering raising output, nearly 10 days below current levels.

Despite oil's rally, many analysts have said the underlying fundamentals remain bearish. This is now starting to change, with U.S. crude stocks falling last week and gasoline inventories dropping for the fifth week.

Reflecting increased expectations that prices will rise, speculators have expanded their net length in NYMEX crude contracts to over 40,000 lots, the highest since February.

Oil as well as base metals investors are now factoring in economic revival and probably a fairly decent 'V', said Commonwealth Bank of Australia commodity strategist David Moore.

There is a risk that if economic data does not continue to support this view of the world that markets become disappointed with the pace of economic recovery, leading to price setbacks, he said.

Also, there is a risk of tempered demand growth as higher prices are passed on in some of the world's fastest-growing oil markets.

Beijing from Monday raised retail diesel and gasoline prices by 6-7 percent, the second and biggest rise this year.

(Additional reporting by Jonathan Leff in Singapore; Editing by James Jukwey)

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