Brent Slips Towards $105 After Gains, Supply Worries Stem Losses

Brent futures slipped back towards $105 a barrel on Tuesday as investors saw the recent surge in prices as an opportunity to book profits, with concerns of an escalation in tensions in the Middle East helping to stem losses.

The benchmark hit its highest in nearly a month above $105 in the previous session as supply worries following Israeli air strikes on Syria trumped concern of weak global demand. Oil also drew support from a record close of the Standard & Poor's 500 Index on hopes of a steady U.S. recovery.

Brent crude slipped 42 cents to $105.04 a barrel by 0455 GMT, after settling up at $105.46, its highest finish since April 10. Brent has rebounded more than $6 a barrel since falling below $99 last Wednesday. U.S. oil fell 70 cents to $95.46, after ending 55 cents higher.

"There is some profit-taking coming in after the sharp rise in prices we saw in the recent days," said Tetsu Emori, a commodities sales manager at AstmaxInvestments in Tokyo. "The current fundamentals are very weak with China slowing down and with U.S. demand not so strong."

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China's crude oil imports last month are expected to have held near to March levels, which were 2.1 percent lower than a year earlier, as some refineries have continued with maintenance programmes amid high fuel stocks. China's preliminary April trade data is due on Wednesday.

Expectations of a further build in U.S. commercial crude stocks after hitting a record high are also weighing 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

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Israel played down weekend air strikes close to Damascus reported to have killed dozens of Syrian soldiers, saying the raids were not aimed at influencing its neighbour's civil war but only at stopping Iranian missiles reaching Lebanese Hezbollah militants.

Brent looks like forming a top around $105.50 per barrel and is due for a deep correction, while U.S. oil is expected to retest support at $94.65, according to Reuters technical analyst Wang Tao.

Price Outlook

Brent may find strong support at $100 a barrel and the U.S. benchmark at $90, Emori said. Prices are unlikely to break below those levels as many producing and exporting countries need oil to hold near there to support annual budgets, Emori said.

"The option to influence prices is more with producers than with the demand side," said Emori. "If prices fall sharply, producers will just lower output and exports."

Analysts at ANZ expect Brent to trade "near the $100 per barrel floor this month," as Europe's prolonged debt crisis and uncertainty over China's growth weighs on the market.

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"Even though supply-side factors should be supportive, we believe the market has largely priced in the ongoing Middle East tensions and Saudi Arabia's production declines during the seasonally softer demand period," ANZ said in a note.

But prices may rise in the second half of 2013, Morgan Stanley <MS.N> said in a research note. The bank said the global oil balance looked much tighter this summer with Brent likely to trade up to $110-$115 in the second half.

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

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