Oil falls amid negative China data, losses remain limited on declining U.S. reserves, EIA in focus

Oil prices fell in the early European session as another batch of negative economic data from China spurred concern over demand prospects in the worlds second biggest consumer. However, losses were stemmed as the American Petroleum Institute reported on Tuesday U.S. crude, gasoline and distillate fuel stockpiles fell last week. EIAs report later today remained in focus.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $107.05 a barrel at 6:51 GMT, down 0.17% on the day. Prices ranged between days high and low of $107.53 and $106.89 per barrel respectively. Light, sweet crude settled higher on Tuesday, trimming this weeks decline to 1% as prices slumped on Monday amid weak U.S. housing data. The American benchmark gained over 14% in the past four weeks.

Meanwhile on the ICE, Brent oil for August delivery traded at $108.14 a barrel at 6:53 GMT, down 0.26% on the day. Prices held in range between days high and low of $108.60 and $108.10 per barrel respectively. The European benchmark settled slightly on the upside on Tuesday, cutting the current weeks decline to 0.3% after closing last week 0.55% lower.

Chinese economy slowdown

On Wednesday, China renewed concern over global oil demand prospects as the countrys vast manufacturing sector decelerated to an 11-month low in July according to the flash HSBC/Markit PMI. The index fell to 47.7, compared to Junes final reading of 48.2 and if confirmed in the final report on August 1, it will be the lowest in 11 months. Readings below 50 indicate contraction in the respective sector.

Meanwhile, a sub-index that measures employment fell for a fourth consecutive month below 50 to 47.3 in July, below Junes 47.7 reading and the the weakest since March 2009. Both negative and positive data about the state of the Chinese economy have a strong influence on oil pricing as the Asian country accounted for 11% of global consumption in 2012, according to BP Plc’s Statistical Review of World Energy.

Lee Chen Hoay, an investment analyst with Phillip Futures, said for Reuters: “The weak China data is likely to weigh on prices. But a major factor that will support prices is the drawdown in U.S. stocks. Assuming the EIA numbers are in the same direction, crude prices will remain supported.”

U.S. reserves poised to decline

Although oil slid towards the red side as Chinese economic data disappointed, prices were supported as a fourth consecutive report by the American Petroleum Institute showed a decline in crude reserves. Meanwhile, tension in Egypt renewed concern over oil supply through the Suez Canal and Suez – Mediterranean pipeline.

The industry-funded American Petroleum Institute reported on Tuesday that U.S. crude inventories fell by 1.44 million barrels last week. Gasoline and distillate fuel stockpiles confounded analysts expectations and declined by 889 000 and 710 000 barrels respectively. However, APIs information is considered as less reliable since it is based on voluntary information from operators of pipelines, refineries and bulk terminals.

According to a Bloomberg survey prior to the Energy Information’s report, U.S. crude oil inventories are expected to have fallen by 2.8 million to 364.2 million barrels last week, the lowest since January. Gasoline reserves should have risen by 1.65 million barrels and distillate fuel stockpiles probably added 1.85 million.

David Lennox, a resource analyst at Fat Prophets in Sydney said for Bloomberg: “The market is expecting a further positive kick from the EIA numbers. Pricing is suggesting that there will be further draw-downs.”

Meanwhile, oil prices continue to draw support by turmoil in the Middle East as a bomb in a Cairo police station killed one and wounded 17 people. Although Egypt is not an oil producer, it controls the Suez Canal and Suez-Mediterranean Pipeline, through which over 2.2 million barrels of oil per day is transported from the Middle East to Europe.

Investors are looking ahead at the Energy Information Administrations weekly crude oil inventories report due at 14:30 GMT on Wednesday. If the government agency confirms APIs statistics, oil is expected to pare earlier losses and advance further.