Oil drops on China manufacturing slump, but tighter supply supports

Singapore: Crude prices dipped on Tuesday as another slump in China`s manufacturing sector outweighed overnight reports of falling U.S. and OPEC production and strong oil demand.

U.S. West Texas Intermediate (WTI) crude futures were trading at $33.63 per barrel at 0122 GMT, down 12 cents cents from their last settlement. But they were still up 30 percent from Feb. 11, when the contract hit a 2016-low of just over $26 a barrel, a level last seen in 2003.

International benchmark Brent crude futures were down 17 cents at $36.40 per barrel, though still up over 20 percent since Feb. 11. Traders said that weak economic data out of China had weighed on oil prices.

Activity in China`s manufacturing sector shrank more than expected in February, with the official Purchasing Managers` Index (PMI) coming in at 49.0, down from the previous month`s reading of 49.4 and below the 50-point mark that separates growth from contraction on a monthly basis. Analysts polled by Reuters had predicted a reading of 49.3.

Despite this, analysts said that there were shifts in oil supply and demand fundamentals that were supporting the market, especially strong demand and dipping oil production in the United States and the Organization of the Petroleum Exporting Countries (OPEC).

"Overall (U.S. oil) consumption rose to 19.4 million barrels per day (bpd) in 2015 (up by 290,000 bpd year-on-year), marking the highest annual rate of consumption since 2008," Barclays bank said on Tuesday.

U.S. government data on Monday showed crude output last December fell for a third straight month by 43,000 bpd to 9.26 million bpd, its lowest in a year, although average annual 2015 crude production of 9.43 million bpd was still 720,000 bpd above the previous year.

Supply from OPEC has also declined, falling by 280,000 bpd between January and February to 32.37 million bpd, according to a Reuters survey based on shipping data and information from sources at oil companies, OPEC as well as from consultants.

But there were also voices of caution, pointing to a remaining crude production overhang of well over 1 million bpd that has left storage tanks around the world swelling with unsold crude.

"The prospect of a detente between two of the largest oil producers in the world (Saudi Arabia and Russia), already at loggerheads over the Syria conflict, was almost too good to be true," Singapore Exchange (SGX) said in a monthly note on Tuesday.

"Alas, this turned out to be the case with the meeting yielding no more than a production freeze subject to compliance from Iran and Iraq. A production freeze is nothing near to a production cut," it added.