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UPDATE 7-Oil prices climb as U.S. equities rally, rig count drops

Devika Krishna Kumar

* OPEC, allies extend output curbs until March 2020

* U.S. crude oil inventories fall 5 mln bbls -API

* Morgan Stanley lowers long-term Brent price forecast

* Crude stockpiles down less than expected in week -EIA (Updates prices, adds Baker Hughes data)

NEW YORK, July 3 (Reuters) - Oil prices edged higher on Wednesday ahead of a U.S. holiday after a steep fall the previous session when worries about a slowing global economy outweighed a decision by OPEC and allies to extend crude output cuts.

Strength in the U.S equities market and data showing U.S. energy firms this week reduced the number of oil rigs operating for the first time in three weeks helped lend support to oil prices.

Each of the major U.S. stock indexes closed at a record high, as expectations grew that the Federal Reserve would take a more dovish turn as a raft of data provided more evidence of a slowing economy.

U.S. oil drillers cut five oil rigs in the week to July 3, bringing the total count down to 788, General Electric Co's Baker Hughes energy services firm said in its closely followed report. Record U.S. crude production has pressured prices over the past year.

September Brent crude futures were up $1.22, or 2%, at $63.62 a barrel by 1:32 p.m. ET (1732 GMT).

U.S. crude futures for August delivery were up 79 cents, or 1.4%, at $57.04 a barrel. On Tuesday, both benchmarks fell more than 4% on worries about a global economic slowdown.

Prices had pared some gains after data showed U.S. crude inventories fell by 1.1 million barrels in the latest week, a much smaller decline than the 3 million barrel decrease analysts had expected.

"The market is disappointed by a very small crude oil inventory draw ... the only sign of strength in the market is the continued modest decline of gasoline inventories" said Andrew Lipow, president at Lipow Oil Associates in Houston.

U.S. gasoline futures led the energy complex, rising about 2.8 percent to $1.922 a gallon.

"We had a pretty sharp correction yesterday, so after that a little rebound is expected. Globally, the market is concerned about oil demand growth potential," Olivier Jakob of Petromatrix consultancy said.

Trading volumes were subdued ahead of the U.S. Fourth of July holiday on Thursday. About 522,637 lots of the U.S. crude futures contract were traded, some 59.5% of the previous session's volume.

On Tuesday, the Organization of the Petroleum Exporting Countries and other producers such as Russia, a group known as OPEC+, agreed to extend oil supply cuts until March 2020.

"Extending the cut by six or nine months, it doesn't really matter if the level stays the same," Jakob said. "If you (OPEC) really wanted to target stock levels, you would need deeper cuts but Saudi Arabia has already gone beyond its cut target."

The OPEC+ agreement should draw down oil inventories in the second half, boosting oil prices, analysts from Citi Research said in a note.

"Keeping cuts through the end of 1Q aims to avoid putting oil into the market during a seasonal low for demand and refinery runs," they said.

Still, signs of a global economic slowdown hitting oil demand worried investors after global manufacturing indicators disappointed and the United States threatened Europe with more tariffs.

The U.S. trade deficit jumped to a five-month high in May and the ADP National Employment Report showed private payrolls increased far less than economists had expected.

Barclays expects oil demand to grow at its slowest pace since 2011. Morgan Stanley lowered its long-term Brent price forecast to $60 per barrel from $65 per barrel, and said the oil market is broadly balanced.

Crude prices also were pressured by signs of a recovery in oil exports from Venezuela in June and growth in oil production in Argentina in May. (Additional reporting by Julia Payne in London, Jessica Jaganathan in Singapore; Editing by David Gregorio, Susan Fenton and Will Dunham)