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Brent weakens towards $102

Chennai, May 23, 2013

Brent crude futures slipped towards $102 a barrel on Thursday as fresh data from China cast doubt on the strength of recovery in the world's second-biggest oil consumer and the dollar weighed on commodity markets.

China's factory activity shrank in May, with the preliminary purchasing managers index (PMI) slipping to a seven-month low, reflecting slower local demand as well as headwinds from the United States and the European Union.

"China's demand for oil will be impacted because the PMI numbers show that the economy is not doing as well as the market had expected," said Chen Hoay Lee, an investment analyst at Phillip Futures, a Singapore-based commodity brokerage.

"The weak PMI and the strong dollar will pressure Brent towards the $100 mark in the near term."

Front-month Brent futures fell 40 cents to $102.20 per barrel by 0445 GMT, after having dropped more than a dollar in the previous session.

US crude dropped 40 cents to $93.88, extending the previous day's losses after inventory data suggested the gasoline market was well supplied ahead of the driving season.

China's flash HSBC purchasing managers' index for May fell to 49.6, while a sub-index measuring overall new orders also dropped to an eight-month low, suggesting the domestic economy is not strong enough to offset soft external demand.

The Euro zone's PMI, due later on Thursday, may also offer clues to the health of the troubled region's economies.

Data from the Energy Information Agency showed that gasoline stockpiles in the US are close to the highest level for this time of year since 1999, rising to more than 220 million barrels, almost 10 per cent higher than last year.

The data has now sparked expectations of a drop in product prices, unless demand picks up as much, traders said.

Also weighing on oil prices is the dollar's jump to a three-year high after comments by Federal Reserve chairman Ben Bernanke as well as the minutes of the Fed's May meeting, which led to speculation that the Fed may begin to scale back asset purchases this year.

If economic improvement continued, Bernanke said in testimony to Congress, the Fed could "in the next few meetings take a step down" in its purchases, while the Fed minutes indicated a debate over how soon to start scaling back the stimulus.

Still, analysts say the dollar's rise may be overdone and fears of a pullback this year may be exaggerated.

"The bottom line, in our view, is that the Fed is not yet ready to start scaling back the degree of accommodation," Bank of America-Merrill Lynch analysts said in a report.

"A slowdown in growth and uncomfortably low inflation will defer tapering until next year," they added.

The US central bank's three quantitative easing programs have released hundreds of billions of dollars into money markets over the last four years, boosting many commodities, including oil. - Reuters




Tags: Brent | PMI | Bernanke |

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