Brent Oil Falls Below $124 Chain Demand

Brent crude dropped below 124 dollars a barrel on Thursday, after weak Chinese manufacturing data sparked concerns that energy demand growth could slow in the oil consumer.

China’s factory activity shrank this month for a fifth successive month, with the overall rate of contraction accelerating and new orders sinking to a four-month low, the HSBC flash purchasing managers index (PMI) showed last Thursday.

“It’s a surprising reading, and is contrary to improving monetary conditions and stabilising external conditions,” said Natalie Robertson, a commodities strategist with ANZ Bank in Melbourne.

“It reflects Chinese demand on the ground, which has a significant impact on commodity markets.”

Brent crude shed 58 cents to 123.62 dollars a barrel, after settling 8 cents up at 124.20 dollars a barrel.

U.S. crude was down 76 cents at $106.51. The benchmark rose $1.20 to settle at $107.27 on Wednesday.

HSBC’s PMI survey, the earliest indicator of China’s industrial activity, fell back from February’s four-month high, slipping to 48.1, and is likely to reinforce the more bearish views on China’s economic trajectory.

“Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand.

“This calls for further easing steps from the Beijing authorities,” HSBC chief China economist, Qu Hongbin, said in a statement.

Slowing activity could mean a further relaxation of monetary policy to help underpin growth in the world’s second-biggest economy.

But lingering inflation risks uncovered by the survey highlight the dilemma facing China’s policymakers who are determined to keep a lid on prices.

Asian shares gave back most of their earlier gains on Thursday after the data was released.

Oil prices also came under pressure from renewed worries about the euro zone debt crisis hitting oil demand.

Portugal’s core public deficit nearly tripled in the first two months of this year, stoking concerns the country may miss its budget targets and follow Greece in requiring more rescue funds.

Investors will now look to manufacturing data in Europe to be released on Thursday, with flash PMI estimates from across the euro zone forecast to show an overall improvement versus February, according to a media poll.

But losses in oil prices were capped by data showing U.S. crude stocks fell 1.16 million barrels to 346.29 million barrels in the week to March 16.

A media poll of analysts had forecast a 2.4-million-barrel build..

Oil markets continue to be driven by the prospect of supply disruptions from Iran, analysts said.

The market is now balancing Saudi assurances that it would make up for any supply shortfalls against the potential risk for the loss of oil from Iran.

This will take place amid tighter Western sanctions on Tehran over its disputed nuclear programme, they added.

“The market remains stretched in terms of spare capacity in our view.

It also is close to the point where the price-reducing effect of further output increases is likely to be countered by the price-increasing effect of perceived reductions in spare capacity,” said analysts at Barclays Capital in a research note.

South Korea would support a release by industrialized countries of oil from strategic reserves to help stem high prices.

Worries that the standoff between the West and Iran over Tehran’s nuclear programme could hit supplies have lifted Brent prices by around 15 per cent this year.