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Oil slips as China manufacturing slows

Brent and US oil fell today after manufacturing in China hit a 28-month low, raising concerns that fuel demand at the world's second largest oil importer may slow. The news came as the market watched progress of reserve oil stocks sales by IEA member nations.

Chinese factory output expanded in June at its lowest pace in 28 months, a survey showed, indicating the world's second-largest economy is feeling the pinch of monetary policy tightening and slack global demand.

ICE Brent crude fell 81 cents to $111.67 a barrel after falling nearly $1 earlier. Brent is on track to post its first weekly rise in a month. US crude was at $94.82 a barrel, down 60 cents.

CMC Markets analyst Ben Le Brun said the data hinted at a recurring theme in China.

“Manufacturing continues to slow but it is still growing above the 50 threshold," Le Brun said.

"It depends on whether you see the glass half empty or half full," he said, adding that investors were either waiting to see data showing contraction at some stage or that tighter policies have successfully tamed inflation, promoting growth.

China's official purchasing managers' index (PMI) fell to 50.9 in June from 52 in May, weaker than market expectations of 51.3, based on a Reuters poll. But it was the 28th straight month that the official PMI has stood above the threshold of 50 that demarcates expansion from contraction.

Global investors are unnerved by any signs of a slowdown in China, a key global growth engine as the US economic recovery loses momentum and Europe struggles with a sovereign debt crisis.

Still, most economists believe the world's second-largest economy, underpinned by the country's relentless urbanisation, is in no danger of a hard landing.

Investors are also watching how well the market can absorb a release of emergency oil stocks by the International Energy Agency as Germany, the Netherlands and the United States sought bids for their crude supplies in tenders.

"We did experience that low point after the announcement of the stocks release, but 60 million barrels is not huge in terms of world consumption," Le Brun said.

"Analysts have started talking about oil (WTI) at $100 again and it's very interesting to see prices at just under the 200-day average at the moment."

WTI prices could hit $100 within this month if they go through a key resistance at $97.27 a barrel, Le Brun said.

The International Energy Agency (IEA) has sent conflicting signals to the market this week. Some traders and analysts said the agency's planned 60 million barrel crude and oil product release has been badly coordinated outside the United States.

Organisation of the Petroleum Exporting Countries Secretary General Abdullah al-Badri demanded an immediate halt to the IEA action designed to force down crude prices earlier this week.

"With that in mind, it's possible that Opec may cut some output," Le Brun said. "This remains to be seen."

Opec oil output is expected to remain lower in June than before the conflict in Libya largely shut down its oil industry, extra supply from Saudi Arabia and other Gulf members.

Supply from all 12 Opec member nations is expected to average 29.45 million barrels per day this month, up from a revised 29.1 million bpd in May, a Reuters survey showed.

But output may be lower than expectations. Industry sources said earlier in June that Saudi Arabia would boost production to almost 10 million bpd this month, but analysts said there was no sign yet of that much demand in the market.

Markets in the United States are shut on Monday for a national holiday.

"There is plenty of economic data ahead of the US holiday on Monday. If they are positive, we would see another uptick in oil prices," Le Brun said.