Oil fell more than a dollar toward $44 on Thursday, after surging nearly 9 percent in the previous session on a surprise drop in U.S. crude stocks that could signal recovering demand in the top energy consumer.
A dip in equity markets in early European trade forced the deteriorating economic outlook back to the forefront, with traders focused on the strength of oil demand as the global economy slows.
The economic outlook is still pretty grim and I don't think these bits of bullish data are enough to counteract this in the short-term, Christopher Bellew at Bache Commodities said.
U.S. crude slipped $1.26 to $44.12 a barrel by 5:30 a.m. EST, after earlier hitting a month high of $45.70, while London Brent crude fell $1.28 to $44.84.
The FTSEEurofirst 300 index <.FTEU3> of top European shares fell 1.2 percent amid persistent concerns about the financial sector.
Oil prices gained some support from remarks by China's Premier Wen Jiabao on Thursday that the No. 2 oil consumer would achieve 8 percent growth this year -- a level considered key to maintain employment growth -- despite the deepening global recession.
China's gauge of the health of its manufacturing sector, the purchasing managers' index (PMI), gained for the third month in a row in February, suggesting the domestic economy, and oil demand, could be recovering.
Wen did not announce further economic stimulus as some investors had expected, but his assurances helped extend a rally in Asian markets, after shares worldwide surged on Wednesday on reports China may boost spending to spur growth.
The U.S. Energy Information Administration said crude stocks declined by 700,000 barrels last week, countering analyst expectations for a 1.2-million-barrel build.
Demand for gasoline in the United States over the past four weeks also rose 2.2 percent from a year ago. Year-on-year gasoline demand has increased in the last several weeks, possibly indicating lower prices are boosting consumption.
Traders were awaiting the release of weekly U.S. initial jobless benefit claims due at 8:30 a.m. EST and January factory orders at 10 a.m. EST, as well as February unemployment data out on Friday, for clues on the health of the world's largest economy.
TO CUT OR NOT TO CUT?
Optimism over China's economy helped boost global stocks from multi-year lows on Wednesday, while metals prices rose, and the U.S. dollar scaled four-month peaks against the yen.
Oil prices have traded in a narrow band around $40 since mid-December, pressured by slumping demand from the global economic slowdown, but drawing support from expectations OPEC might cut production again when it meets on March 15.
It looks like oil will continue to trade in a sideways range for now, said Bellew at Bache Commodities.
But when it finally breaks out of this range, my opinion is that we'll see it go higher -- if the stock surplus starts to be eaten away and there are some signs of an end to the recession.
OPEC planned to lower oil output by 4.2 million barrels per day from production levels in September, in a bid to boost falling prices, and a Reuters survey found OPEC members had already met at least 81 percent of their target.
Angola, which currently holds the presidency of the 12-member group, will not advocate further production cuts when the group meets on March 15 in Vienna, OPEC sources said on Wednesday.
Ecuador also said it sees no need for more reductions at the next meeting, while other OPEC members have yet to make a decision.
But Venezuela, Algeria and Libya have raised the possibility of a further cut.
(Reporting by David Sheppard; Editing by Anthony Barker)