Oil fell below $65 a barrel on Friday but was on track for its largest monthly percentage gain in more than a decade after government data showed a surprisingly sharp drop in U.S. crude inventories and OPEC left output steady.

Oil prices have jumped nearly 27 percent this month, buoyed by hopes of a global economic recovery later this year and a bullish price outlook from OPEC kingpin Saudi Arabia.

U.S. crude oil for July delivery fell 35 cents to $64.73 a barrel by 0255 GMT. The contract, which has risen about 5 percent this week, settled up 2.6 percent at $65.08 on Thursday, a new six-month high.

London Brent crude fell 39 cents to $64.00.

Oil lost a bit of ground this morning but it's still trading at very high levels, said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

The market seems to be focusing strong on the bullish sentiment and the brighter macroeconomic outlook, but it's a little doubtful whether the demand fundamentals can continue to support oil prices at such levels.

Japanese industrial production rose 5.2 percent in April on a monthly basis, and the government expected continued gains through June.

Better U.S. durable goods orders out on Thursday also reinforced the sense that the global economic slump might be abating, despite a disappointing U.S. home sales report and lingering concerns over mounting Western government debt.

Another bright spot was U.S. crude stocks, which fell by 5.4 million barrels in the week to May 22, the U.S. Energy Administration said, way above analysts' expectations in a Reuters poll for a 700,000 barrel decline, as refiners ramped up output ahead of the summer driving season.

Gasoline inventories also dropped for the fifth week in a row as demand rose in the week preceding the Memorial Day holiday, which traditionally marks the start of the summer driving season in the U.S.

OPEC's decision to hold production steady helped prop up prices.

The producer group on Thursday kept its output targets unchanged as the market had expected, betting on a strengthening world economy and tentative signs of increased demand.

Analysts said Saudi Arabia's rare forecast this week that oil prices could reach $75 a barrel later this year represented a distinct policy shift from the world's largest oil producer, which has until recently been hinting that it would be happy with a lower price to help the world economy back on its feet.

Taken in this light, Saudi's statement clearly represents a policy shift from a priority on the economy to a view that higher prices are not something that Saudi Arabia will stand in the way of, JP Morgan's energy analyst, Lawrence Eagles, said in a note.

Investors will be keeping a close watch on economic data due later, including U.S. first-quarter preliminary GDP figures and Reuters/University of Michigan May consumer sentiment.

(Editing by Ben Tan)