Oil drops to $65 on U.S. shale outlook, dollar

By Alex Lawler

LONDON (Reuters) - Oil fell to around $65 a barrel on Tuesday, pressured by the possibility that U.S. shale oil producers could increase drilling activity and by a stronger dollar.

U.S. drillers cut the number of rigs by just one last week, data showed on Friday, and Goldman Sachs said prices were at a level that would spur activity. The dollar could rally further, Morgan Stanley said, adding to a growing list of headwinds crude faces that include rising OPEC supply.

Brent crude was down 45 cents at $65.07 a barrel at 0948 GMT, while U.S. crude, also known as WTI, was 43 cents lower at $59.29.

"The main factor weighing on prices is the significantly appreciating U.S. dollar," said Carsten Fritsch, analyst at Commerzbank. "What is more, the decline in drilling activity in the U.S. that has been ongoing for 23 weeks appears to have stopped."

More drilling in the United States would lessen the prospect of a tighter oil market in coming months, one of the factors that have helped Brent rise from a near six-year low close to $45 in January.

"We believe that should West Texas Intermediate prices remain near $60 a barrel, U.S. producers will ramp up activity, given improved returns," Goldman said in a report.

A stronger dollar makes dollar-priced commodities more expensive for buyers using other currencies, and tends to weigh on oil prices. The dollar hit a one-month high against a basket of major currencies on Tuesday.

"The USD downward correction is complete," Morgan Stanley said in a report. "A stronger dollar would only reinforce our near-term concerns for oil prices, especially Brent."

Brent collapsed from $115 in June 2014 due to ample supplies in a decline that deepened after OPEC last November dropped its policy of cutting output to support prices, in a bid to slow higher-cost competing supply sources such as U.S. shale.

Taking turns in dominating sentiment since then are concerns about ample supplies currently and the prospect of a tighter market ahead as supply growth from higher-cost producers slows.

The Organization of the Petroleum Exporting Countries gathers on June 5. On Sunday, Iran said OPEC was unlikely to change its production ceiling at the meeting.

(Editing by Alison Williams)