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UPDATE 5-Trade wars tip oil towards biggest monthly drop in 6 months

Shadia Nasralla

* Trump announces import tariffs on Mexican goods

* U.S. already in trade war with China

* Analysts fear trade conflict will weigh on oil demand

* U.S. crude stocks draw less than expected (Updates prices, adds detail of price survey)

LONDON, May 31 (Reuters) - Oil was on track for its biggest monthly drop in six months on Friday as U.S. President Donald Trump ramped up trade tensions, weighing on the demand outlook.

Brent futures are heading for an 11% slide in May and WTI for a 14% drop, their biggest monthly losses since November.

"No notice was taken of data that were positive for prices, whereas mildly disappointing figures put prices under considerable pressure," Commerzbank analysts said.

"This selective reaction is typical of a climate of severe pessimism, as is the fact that market players are currently focusing only on demand worries while ignoring the fact that supply remains limited."

Front-month Brent crude futures, the international benchmark for oil prices, were at $64.80 at 1342 GMT, down $2.07 from last session's close.

U.S. West Texas Intermediate (WTI) crude futures were at $54.93 per barrel, down $1.66 from their last settlement.

Both grades earlier hit their lowest since March 8.

U.S. President Donald Trump vowed on Thursday to slap tariffs on all goods from Mexico unless it stops illegal immigration, firing up fears over economic growth and appetite for oil.

"U.S. refiners import roughly 680,000 barrels per day of Mexican crude. The 5% tariff adds an extra $2 million to the cost of their daily purchases," PVM analysts said.

The Mexico trade dispute adds to a trade war between the United States and China, which many analysts expect to trigger a recession..

China's factory activity shrank more than expected in May, an official survey showed on Friday.

U.S. OUTPUT BACK TO RECORD

Crude prices have also been under pressure from a return in U.S. oil production <C-OUT-T-EIA> to a record 12.3 million barrels per day, and a much smaller than expected decline in U.S. stockpiles.

The U.S. Energy Information Administration (EIA) said crude stocks fell by around 300,000 barrels last week <C-STK-T-EIA>.

That was much less than the 900,000-barrel decline analysts had forecast in a Reuters poll, and well below the 5.3 million-barrel drawdown seen by the API industry body.

Giving a floor to prices, top oil exporter Saudi Arabia's increased output in May was not enough to compensate for lower Iranian exports, a Reuters survey found.

Washington will sanction any country that buys oil from Iran after the expiration of waivers on May 2, U.S. Special Representative for Iran Brian Hook said on Thursday.

The Wall Street Journal had reported earlier on Thursday that countries like China and India that were issued waivers in November to buy Iranian oil could continue the purchases after May 2 until they reached a negotiated cap.

A Reuters survey showed Brent crude prices are likely to hold near $70 a barrel for the remainder of the year as elevated supply risks in the Middle East offset risks to demand from the U.S.-China trade spat.

(Additional reporting by Colin Packham in SYDNEY and Henning Gloystein in SINGAPORE; Editing by Alexander Smith and David Evans)