Brent Slips Towards $108

• Refinery run cuts reducing physical demand
• China PMI data fuels hope economy is stabilising
• Coming up: API weekly oil data at 2030 GMT

Brent crude oil futures slipped towards $108 a barrel on Tuesday, reflecting weak European refining demand, but reasonable Chinese manufacturing data helped keep a floor under prices.

Brent futures for July were down 36 cents at $108.47 a barrel by 1351 GMT. U.S. crude was down 12 cents at $102.35 a barrel.

"I think technically Brent has broken to the downside and that it will trend lower gradually," said Christopher Bellew, an oil broker at Jefferies Bache in London. "However, the market is pretty well-balanced fundamentally and geopolitical risk is still with us, so I do not envisage prices going below $105."

Ole Hansen, senior commodity strategist at Saxo Bank, agreed the risk was to the downside with speculative net long positions near record highs for U.S. and Brent crude. Some liquidation would push prices lower.

"There is quite a significant overhang of longs in the market that could be flushed out," he said. "But that's not a concern as long as we stay above $100."

Nevertheless, the futures market is beginning to reflect weakness in the physical market, where price levels dipped to two-year lows last week. This was driven by weak demand in Europe, as refiners are suffering from poor margins and have begun cutting runs.

"Logistical bottlenecks, long lead times in planning, pockets of regional demand strength and expectations that someone else will blink first have all delayed run cuts in Europe, but we are at the juncture now when cuts are ensuing," analysts at Energy Aspects said in a note.

Ample Supply
At the same time, supply of the four crudes that underpin the Brent futures contract is seen as ample, with very little moving outside northwest Europe at present.

Energy Aspects forecasts Brent could fall towards $107 a barrel once refiners in northwest Europe cut runs. Mediterranean refiners have already embarked on voluntary run cuts, it said.

Some reasonable numbers from China's factory and services sector helped keep a floor under oil prices, with their best showings in months. The final HSBC/Markit purchasing managers' index (PMI) rose to 49.4 in May, a four-month high.

"The market received a little bit of a boost from those Chinese numbers - it paints a picture of continued slow recovery and stabilisation," said Hansen. "This should support oil demand growth in China." 

(By Claire Milhench, Additional reporting by Florence Tan in Singapore, editing by David Evans and Susan Thomas)