Crude Weakens as Demand Concerns Reassert Themselves

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Jim Seida | NBC News

Brent crude oil fell after an early rally on Tuesday, tracing losses in U.S. equity markets as weak fundamentals curbed initial gains spurred by strong German data, central bank policy and tension in the Middle East.

Oil prices, which had been trading higher, initially trended lower as the S&P 500 and the Dow Jones Industrial Average Index both dropped sharply. Around late-morning, however, the paths of oil and equities diverged as stocks recovered, rallying to intraday highs by noon.

Fears of supply disruption after the Israeli air strikes on Syria close to Damascus sent Brent to near-month highs early in the trading session, leaving the market overextended. Those fears subsided and Brent fell in the absence of clear signs of strengthening global demand, traders said.

Brent crude lost more than $1 to end the session above $104 a barrel, well below the session's peak at $105.88, the highest since April 11. Still, Brent has still rebounded more than $5 a barrel since falling below $99 last Wednesday.

U.S. light, sweet crude fell about 50 cents to trade well above $95 a barrel.

Oil and other risk-sensitive assets, such as equities, were boosted by renewed optimism about the global economy, thanks in part to supportive measures from central banks.

The Reserve Bank of Australia cut its cash rate by 25 basis points on Tuesday to a record low of 2.75 percent.

On Monday European Central Bank (ECB) president Mario Draghi said that the ECB would cut rates again if needed.

Positive data also helped to lift prices, with German industrial orders rising again in March, confounding expectations for a drop and helping to brighten a rather gloomy demand outlook.

"Our rally seems to have stalled a bit as we enter more overbought conditions," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut.

McGillian pointed out that the German data did not indicate an end to the wider problems plaguing the Eurozone economies. "The underlying fundamentals aren't there. The problem hasn't been Germany and other Northern countries, it's been the Southern European countries," he said.

China Focus

Attention focused again on China, the world's second-largest economy, ahead of preliminary April trade data due on Wednesday.

China's crude oil imports last month were expected to have held near March levels, which were 2.1 percent lower than a year earlier.

Chinese inflation data on Thursday and money supply and loan growth figures expected from Friday will also be watched.

Expectations of a further build in U.S. commercial crude oil stocks, after hitting a record high, dragged on prices.

A preliminary Reuters poll, taken ahead of weekly inventory reports from the American Petroleum Institute (API) and the U.S. Energy Department's Energy Information Administration (EIA), forecast on average that crude stocks increased by 1.8 million barrels in the week ended May 3.

Prices may rise in the second half of 2013, Morgan Stanley said in a research note. The bank said that the global oil balance looked much tighter this summer, with Brent likely to trade up to $110 to $115 in the second half.

In the week to April 30, hedge funds and other large speculators increased bets on higher Brent prices, upping net long positions by 9,614 contracts to 108,741, data from the IntercontinentalExchange (ICE) show.