Oil jumps on bullish inventory data, bonds rise

By Herbert Lash

NEW YORK (Reuters) - Oil prices jumped to almost $65 a barrel on Thursday, lifted by bullish U.S. inventory data, while U.S. Treasury bonds recovered some ground a day after worries about a record $1.75 trillion budget deficit sparked a sell-off.

The euro rose against the U.S. dollar and the yen fell broadly as better-than-expected U.S. manufacturing data and a slide in jobless claims lured investors in the Japanese currency into overseas assets.

European shares fell and many U.S. stocks trended lower after April new home sales data and a downward revision to March's sales pointed to more weakness in the slumping U.S. housing market.

Bank-to-bank three-month dollar borrowing costs fell, but money markets remained strained and fears about counterparty risk were not far beneath the surface.

U.S. crude stocks fell more than expected last week as refiners ramped up operations, while gasoline inventories dropped for the fifth week, the Energy Information Administration said in weekly data released on Thursday.

Commercial crude inventories fell 5.4 million barrels in the week ended May 22, the EIA said, dwarfing the 700,000-barrel decline analysts had forecast in a Reuters poll.

"What we are seeing here is the demand side start to improve," said analyst Phil Flynn at Alaron Trading in Chicago.

"Gasoline demand over the Memorial Day weekend is a critical point in judging the health of the U.S. economy. I don't think the increased demand over the holiday was a fluke."