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Oil falls on supply concerns; pickup in China manufacturing helps

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Reuters SINGAPORE
Last Updated : Mar 02 2015 | 12:57 PM IST

By Florence Tan

SINGAPORE (Reuters) - Oil stayed in the red on Monday on supply concerns despite partly recovering from earlier losses after a private business survey showed an improvement in China's manufacturing sector in February.

Brent and U.S. crude futures fell about 1 percent early on Monday, after their first monthly rise since June, as surplus oil supply outweighed Beijing's efforts to support the world's second largest economy.

"The key drivers over the next few months are going to come from supply dynamics more than demand dynamics," said Ric Spooner, chief analyst at CMC Markets in Sydney.

"The market is moving into a holding pattern while waiting to see more evidence that production is going to be reduced."

Brent crude was down 38 cents at $62.20 a barrel by 0645 GMT after an 18 percent gain in February, the largest monthly rise since May 2009. U.S. crude dropped 38 cents to $49.38 a barrel after rising 3 percent in February.

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Manufacturing activity in China edged up to a seven-month high in February, HSBC's survey showed. On Saturday, the Chinese central bank cut key interest rates to support its economy.

"That should see a little bit more risk appetite coming back into the market over the next couple of hours," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

"We've seen a bottom and it's just how much prices will run up."

Analysts said in a Reuters survey that oil prices have probably touched a bottom and should recover in the second half of 2015 as the collapse in the market over the last year begins to curb production.

Iraq's oil minister, Adel Abdel Mehdi, said on Sunday he expected to see a barrel of crude selling at around $65.

Supply disruption among members of the Organization of the Petroleum Exporting Countries (OPEC) in February also supported Brent, stretching its premium over U.S. crude to the widest since January 2014 on Friday at $13 a barrel.

The spread narrowed on Monday following a recovery in Libya's oil production to more than 400,000 barrels per day (bpd).

Still, technical charts pointed to a further widening of the spread to $16.98 in the next three months, Reuters market analyst Wang Tao said.

A rebound in prices in February may have slowed production cuts in the United States. The number of oil rigs fell 33 last week to 986, the smallest drop since the beginning of the year, a survey showed.

(Reporting by Florence Tan; Editing by Joseph Radford and Gopakumar Warrier)

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First Published: Mar 02 2015 | 12:46 PM IST

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