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Oil prices steady as China economic outlook worries counter supply cuts

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Oil prices stabilised on Monday as concerns about China’s faltering economic recovery and a stronger dollar took the momentum out of seven weeks of gains on tightening supply.

Brent crude futures slipped 42 cents to $86.39 a barrel by 1431 GMT while U.S. West Texas Intermediate crude edged 31 cents lower to $82.88 a barrel.

“Crude has been in overbought territory for some time now, defying expectations of a correction,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.

Hari said the focus had been on U.S. economic optimism, to the exclusion of economic headwinds in the eurozone and China.

“A rebalancing is overdue but it may need a reality check in the markets stateside,” she added.

China’s sluggish economic recovery and a stronger U.S. dollar could depress prices, but OPEC+ has indicated it would do whatever it takes to tighten supply and stabilise markets, CMC Markets analyst Tina Teng said.

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The U.S. dollar index extended gains after a slightly bigger increase in U.S. producer prices in July lifted Treasury yields despite expectations the Federal Reserve is at the end of hiking interest rates.

A stronger dollar pressures oil demand by making the commodity more expensive for buyers holding other currencies.

Meanwhile, supply cuts by Saudi Arabia and Russia, part of the alliance between the Organization of the Petroleum Exporting Countries and their allies, or OPEC+, are expected to erode oil inventories over the rest of this year, potentially driving prices even higher, the International Energy Agency said in its monthly report on Friday.

Last week’s encouraging demand estimates, falling OPEC supply, declining inventories and mitigated inflationary pressure, said Tamas Varga of oil broker PVM, “is a warning signal that unless China joins the party the path upwards will be paved with pitfalls”.

Separately on Monday, a Shell spokesperson said exports of Nigeria’s Forcados crude oil resumed on Sunday, roughly a month after loadings of the medium sweet grade were suspended because of a potential leak at the export terminal.

The suspension contributed to Nigeria becoming the second-biggest contributor to the drop in OPEC crude oil output in July, a Reuters survey showed.

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