Brent Dips Below $108, Market Well-Supplied

China July factory sector grows at fastest pace in 18 months; weak demand from European refiners creating contango.

Brent crude dipped below $108 a barrel on Thursday as unseasonably weak demand from European refiners and plentiful supplies offset strong Chinese factory data.

Brent for September delivery was down 30 cents at $107.73 a barrel by 1117 GMT, after closing 70 cents higher on Wednesday. U.S. crude was down 28 cents at $102.84 a barrel, after gaining 73 cents in the previous session.

"Oil is moving in a small range. It opened relatively high and was supported in Asia on the back of the Chinese/HSBC data," said Ole Hansen, senior commodity strategist at Saxo Bank.

"But Brent is in contango, reflecting weak demand from European refiners," Hansen added. Contango is a situation in which the price of oil for near-term delivery is cheaper than that for delivery further into the future.

China's factory activity expanded at its fastest in 18 months in July as new orders surged, a preliminary HSBC survey showed. China is the world's second-biggest oil consumer, so the data is positive for demand.

However, the picture in Europe is more sobering as refiners remain under pressure due to an influx of oil products from the United States. European refiners have been cutting runs at what should be one of the busiest times of the year, or idling plants altogether.

"The market is comfortably supplied with seasonal demand in Europe still slackening despite a slight improvement to refinery margins," said Andrey Kryuchenkov, oil analyst at VTB Capital.

Physical crude prices are under pressure as a result, with West African and North Sea barrels selling slowly even at bargain levels.

These weak fundamentals filtered through to the futures market earlier this month, triggering heavy liquidation of hedge funds' long positions. Analysts and traders said the market was now in a consolidation phase, moving sideways.

"The longs liquidation in London drove the market to three-month lows earlier this month and it is only natural for the market to take a breather," Kryuchenkov said.

Prices had pushed higher on Wednesday after data from the U.S. Energy Information Administration showed that U.S. crude stocks fell by 4 million barrels last week. Analysts had expected a decrease of just 2.8 million barrels.

Crude stocks at the Cushing, Oklahoma delivery hub for U.S. benchmark oil fell by 1.5 million barrels.

NO SUPPLY CONSTRAINTS

Conflicts in Eastern Europe and the Middle East are also keeping a floor under prices, but crude supply from Iraq remains unaffected by fighting in the country.

Analysts foresee no sustained gains in oil prices unless supply is disrupted, but some believe the market has become complacent about the risks.

"When the battle for Baghdad starts, then Iraq will be back as a price input," Olivier Jakob, an oil analyst at Petromatrix, told Reuters' Global Oil Forum. "Right now it is too low on the radar screen."

In another supply development, South Korea and Japan have purchased the first condensate cargoes to be exported from the United States since the easing of a 40-year ban on U.S. crude exports.

"It means very little in itself, but because of current events it takes on a more political or symbolic importance," said Alex Yap, a senior oil analyst at FG Energy.

"If the U.S. wants its allies to be less dependent on the likes of Russia and Iran, it has to show some willingness to step up as a supplier instead of keeping the bounty from shale production within its own market."

By Claire Milhench