Oil slips on fears of fallout from downturn

World oil prices fell a dollar yesterday after weak economic data from the world's second-biggest oil user China outweighed flimsy support from market expectation the sovereign debt crisis on both sides of the Atlantic could somehow be contained. Comment from IEA director Nobuo Tanaka that there was unlikely to be another release for now from emergency stockpiles was already factored in, traders said. But his prediction that leading Opec exporter Saudi Arabia would increase output further added to bearish sentiment. Brent dropped $1.12 (Dh4.11) to $117.03 a barrel, while US crude was 92 cents lower at $97.48. Article continues below Slack demand The HSBC flash PMI, the earliest available indicator of industrial activity in China fell to 48.9 in July, its lowest since March 2009, as monetary policy tightening and slack global demand weighed on the economy. The index was last below 50 in July 2010. Asia as a whole and particularly China are expected to be the prime source of demand growth for oil as the world's top oil consumer the United States and Europe grapple with economic crisis. Officials said Germany and France had reached a common position on a second bailout of Greece in their effort to prevent the country's debt crisis from spreading through Europe. In the United States, the White House signalled it could support a short-term increase in the US borrowing limit for "a few days" if lawmakers agreed to a broad deficit reduction deal but needed more time to pass it. The move, a shift from President Barack Obama's previous position, reflects the growing political reality that time is short for Congress to pass a massive deficit-cutting deal before the United States runs out of money on August 2. "Everybody somehow assumes the United States will find a solution and Europe will find some face-saving exercise," said Olivier Jakob of Petromatrix. "The market has factored that in." The United States is especially nervous about the impact of high oil prices on its fragile economy in the run-up to an election year and was responsible for providing half of a nearly 60 million barrel release from consumer country reserves announced on June 23. The International Energy Agency gave itself 30 days — a deadline that expires at the end of this week — to review the impact of that release. Stability It has failed to bring down the overall oil price, but some analysts have said it helped to cap gains and provide some stability because it injected more high-quality oil into the market. The IEA's emergency reserves release followed the failure of Opec in June to agree a Saudi-led proposal to increase supplies. In defiance of the Organization of the Petroleum Exporting Countries as a whole, Saudi Arabia unilaterally increased its supplies. They climbed to around 9.8 million bpd in June, a senior Opec delegate said, and Tanaka predicted they would rise to 10 million bpd in July.