Array

SYDNEY, May 26 (Reuters) Oil prices extended gains over $71 on Friday, buoyed by healthy U.S. economic growth that hinted recent record prices may not hit robust demand.

In tandem with other commodities, oil has had a volatile week, bouncing as investors juggle supply-side concerns with fears inflation could lead to higher interest rates, dampening economic performance and therefore demand for raw materials.

U.S. crude gained 15 cents to $71.47 a barrel by 0247 GMT, building on Thursday's $1.46 or 2 percent rally. London Brent crude was up 17 cents at $70.88.

''The growth number was quite strong, perhaps dispelling some fears that the sky is falling in on the U.S. economy,'' said Tony Nunan, assistant general manager of risk management at Mitsubishi Corp. ''Buoyed by that, and ahead of a three-day holiday weekend, oil traders in the U.S and Europe don't want to be caught short.'' The U.S. economy grew 5.3 percent year-on-year in the first quarter, its fastest rate for 2-{ years, but analysts cautioned against reading too much into the news, saying the Federal Reserve would focus on newer data when setting interest rates.

Growth was stronger than previous forecasts, but came in below Wall Street estimates for 5.7 percent. There were signs inflation was restrained, relieving some interest rate pressure.

Commodities have yo-yoed since touching record highs in April, with investment funds betraying fears the high prices they have supported could be unsustainable if creating inflation.

The volatile July crude futures contract has swung between $68 and $75 during May in a shifting demand and supply outlook. It remains below April's record $75.35, but is still up 17 percent in 2006 as geo-political issues cloud supply security.

Longer-dated oil futures have remained resolutely above $70 as the West jousts with Iran over the Islamic state's nuclear ambitions, the U.S. braces itself for a summer of hurricanes and its refineries scramble to boost output to meet demand.

World powers are likely to meet in Europe next week to finalise a package of proposed threats and incentives to stop OPEC member Iran's nuclear programme, which some believe is for weapons despite Tehran's insistence it wants nuclear power.

''Things seem to be moving sideways on Iran,'' said Mitsubishi Corp's Nunan. ''We're still waiting for a clear-cut proposal.'' Officials are said to have made progress at a first meeting in London on Wednesday, but Russia is yet to be convinced on some sanctions proposed to maintain oil supply from the world's fourth biggest exporter. President George W. Bush said he will consider incentives for Iran if it suspends uranium enrichment.

Oil's peaks have also been driven by forecasts of an active hurricane season for the U.S. Gulf, still recovering from last year's storms.

But prices troughed midweek on a bigger-than-expected rise in U.S. gasoline stocks ahead of the start of the summer driving season on the U.S Memorial day holiday on May 29.

REUTERS CS KN1115