Oil falls below $108 as China manufacturing slows

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Brent crude oil fell towards $107 on Wednesday as weak China data renewed concerns over demand growth from the world's second-biggest oil consumer, although falls in U.S. refined product and crude stocks helped stem losses.

Activity in China's manufacturing sector slowed to an 11-month low in July as new orders faltered, a preliminary survey showed on Wednesday, pointing to slower economic growth.

"It adds to the concern about the outlook for demand, and brings into question just how strong Chinese commodities demand will be," said Alexandra Knight, economist at National Australia Bank.

But oil gained some support from a U.S. industry report showing drops in crude and product inventories, particularly gasoline.

Brent crude was down 95 cents to $107.47 a barrel by 1352 GMT, after settling 27 cents up on Tuesday. U.S. oil was down 61 cents at $106.62, after ending 29 cents higher.

Copper fell from one-month peaks and the dollar took back some ground after the China data.

Inventory figures from the U.S. Department of Energy's Energy Information Administration (EIA) were due at 1430 GMT.

Investors will be keen to see if they confirm Tuesday's report by the American Petroleum Institute (API).

Surprise falls in oil product stockpiles in the API report revived hopes of a rise in demand growth in the United States, the world's biggest oil consumer.

Both U.S. gasoline and distillate fuel stockpiles, which include diesel and heating oil, fell several hundred thousand barrels versus expectations in a Reuters poll of gains of more than a million barrels, the API data showed.

The surprise drops overshadowed a smaller-than-expected fall in crude stocks, indicating healthy U.S. oil demand.

"Crude prices found support from declining U.S. stocks and supply disruptions," analysts at ANZ said in a note.

Oil prices also continue to be supported by conflict and tension in the Middle East, with a bomb killing one and wounding 17 in Cairo early on Wednesday.

Brent's premium above U.S. oil futures <CL-LCO1=R>, which briefly inverted last Friday, remained narrow at below $1.

Brent tends to respond more to global data than its U.S. counterpart and Wednesday's Chinese manufacturing numbers could weigh more heavily on the North Sea crude futures contract.

A sub-index of the HSBC/Markit PMI measuring employment slid to 47.3 in July, the weakest since March 2009. It stood at 47.6 in June and has been below 50 for four months.

Most economists say China is likely to see a gradual decline in growth to about 7.5 percent this year.

But Societe Generale sees "a non-negligible risk that China could land hard, with growth of less than 6 percent in 2013".

Its head of commodities research, Michael Haigh, said such a "hard landing" for China could force oil down to around $75 per barrel. "The demand model suggests that Brent would drop about 30 percent (or) approximately a $30 decline."



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