Brent Nears 4-Month Low on China News, Firming Dollar

Weak China PMI survey dents oil demand outlook; seasonal demand in U.S. has limited downside this week.

Oil prices hovered near four-month lows on Friday after data showed a contraction in China's factory sector and the dollar rose against a basket of currencies.

Activity in China's manufacturing sector shrank at the fastest pace in 15 months in July, according to a preliminary private purchasing managers' survey.

"Concerns around the demand environment were heightened further today by the PMI (Purchasing Managers' Index) read out of China," said Michael McCarthy, chief market strategist at CMC Markets in Sydney.

Brent crude was down 15 cents at $55.11 a barrel by 1112 GMT, having hit an intraday low of $54.80, its lowest since early April.

Brent has lost nearly 13 percent in July, its largest one-month fall since a near 19 percent loss in January, although downside has been less severe this week. Prices traded in the tightest weekly range in 11 months, as strong seasonal demand, particularly for gasoline in the U.S. summer driving season, helped mitigate the longer-term effect of a global supply glut.

This cushion, however, is likely to be short-lived.

"You have ... global crude runs peaking right now. The physical market has done a bit better because European refinery demand has been very strong. So this is as good as it gets for crude demand, but we've had this wealth of supply come down," Chris Main, an oil strategist at Citi, said.

U.S. crude for September delivery edged up 18 cents to $48.63 a barrel, having settled on Thursday down 74 cents at $48.45, the lowest since March 31.

Main said that, for now, the most-active U.S. crude futures contract might see some respite from the selling that knocked it to its lowest in four months.

"We've come down $12 in three weeks, so I don't think people now see the prompt as necessarily the big sell. Where there is potential is a bit further down the curve," he said.

Both benchmarks have seen losses this month, partly due to a stronger dollar, which makes it more profitable for non-U.S. investors to sell commodities, and partly on expectations of greater Iranian supply following last week's deal over Tehran's nuclear programme with world powers.

WTI crude oil has lost 18 percent in July, the biggest one-month decline since December and the second-largest monthly loss in the last seven years.

Analysts believe that the prospect of lower oil prices could force the world's top producers to cut spending as they face the prospect of yet another hit to quarterly profits.

By Amanda Cooper