Brent futures held above $112 a barrel on Tuesday as investor attention shifted back to demand after China's factory growth rose to a six-month high, adding to signs the economy of the world's second-biggest oil consumer is regaining strength.
Oil markets have for weeks been rattled by supply concerns due to the Ukraine crisis and as a takeover of large areas of Iraq by Sunni militants stoked fears of disruption in exports from Opec's second-biggest producer amid unsteady shipments from Libya and others. As those fears recede somewhat, investors are looking for fresh clues to gauge the direction of the market.
Brent crude gained 7 cents to $112.43 a barrel early on Tuesday, after ending down 94 cents at its lowest settlement since the rally spurred by the Iraqi crisis started on 12 June. US oil rose 17 cents to $105.54 a barrel.
"Markets are looking for a catalyst to see where prices are headed from here," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney.
"We certainly need to keep an eye on Iraq and see what is happening in Ukraine. But overall economic data, including those from the United States, seems to suggest the global economy is improving."
China's official Purchasing Managers' Index (PMI) stood at 51 in June, the National Bureau of Statistics said, quickening from May's reading of 50.8 and in line with market expectations on improving domestic and foreign demand.
Oil, particularly the US benchmark, drew additional support from forecasts US commercial crude inventories dropped 2.3 million barrels in the week to 27 June, while product stockpiles rose, a preliminary Reuters poll showed. It also estimated distillate stockpiles rose 600,000 barrels, while gasoline inventories increased 800,000 barrels.
A slide in Opec's output also supported prices. The producer group's output fell in June from May's three-month high, a Reuters survey found, as fighting in Iraq closed its largest refinery and technical problems slowed its southern exports, underlining how unrest and outages in the Middle East and Africa are taking their toll on Opec supply.
Fears of disruption in Iraqi supplies and unrest in Ukraine just as shipments from Libya and other producers remain unsteady have kept oil at elevated levels despite a weak demand outlook.
A Reuters monthly poll of 26 analysts forecast Brent crude would average $108.00 a barrel in 2014, the highest average forecast of a Reuters poll so far this year and well above the $105.90 average projected in last month's poll.
The North Sea benchmark has averaged $108.72 so far this year, little changed from the average last year. US crude, would average $100.40 in 2014, above the $98.05 average in 2013. WTI has averaged $100.72 so far this year.
Looking ahead, investors are now awaiting the crucial US jobs growth numbers due on Thursday. Nonfarm payrolls probably increased 212,000, marking the fifth consecutive month of job gains above 200,000, according to a Reuters poll of economists. That, together with signs of a housing recovery, would cement views that US growth has rebounded.