Brent oil rises on China optimism, U.S. crude falls

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Brent crude oil gained slightly on Tuesday, above $108 per barrel, lifted by optimism on the Chinese economy and on worries about lower supply.

U.S. crude fell by contrast, down for a second session, with investors anticipating an end to a summer demand spike.

Riskier assets gained after local media in China reported the government was looking to increase investment in railway projects as part of efforts aimed at ensuring annual economic growth does not sink below 7 percent.

Brent futures were up 38 cents to $108.53 a barrel by 1308 GMT.

Brent is up more than 5 percent this month and U.S. crude almost 10 percent, bolstered by economic optimism, supply disruption in Libya and worries about escalating violence in the Middle East.

However U.S. crude, which was down 70 cents at $106.24, is seen as vulnerable to seasonal switches in demand.

"Now as we move out of peak demand season, which is end of August typically, we would see demand for crude declining and with it the light crude prices should reduce as well," said Abhishek Deshpande, oil analyst at Natixis.

European benchmark Brent's premium over U.S. West Texas Intermediate increased. The September <CL-LCO1=R> contract was trading about $2.40 higher than its U.S. equivalent, after the two front-month crude benchmark contracts converged this week.

Goldman Sachs said in a note that it expects Brent's premium to expand again, with a forecast of an average spread of $8-$9 for 2014.

SUPPLY SQUEEZE

Worries about lower supply was also supportive of prices, with violence in the Middle East keeping Brent prices elevated.

Protesters demanding jobs closed off the eastern Libyan port of Zueitina for a sixth day on Monday, extending a halt in oil exports, according to a senior oil industry source and one of the demonstrators.

Also increasing supply risks, six people were killed in Cairo on Tuesday in violence between supporters and opponents of deposed President Mohamed Mursi, state-run media reported.

Any Middle East conflict raises worries of disruption to oil-producing areas or shipments, although none has taken place due to the Egyptian crisis so far.

U.S. commercial crude oil stockpiles likely fell for a fourth straight week, a Reuters poll of seven analysts showed on Monday.

The poll, taken before weekly inventory reports from the American Petroleum Institute (API) on Tuesday and the U.S. Department of Energy's Energy Information Administration (EIA) on Wednesday, forecast that crude stocks fell 2.4 million barrels on average in the week ended July 19.



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