Brent crude oil prices held above $112 a barrel on Thursday, supported by upbeat manufacturing data from China and Germany, but U.S. crude stocks remained in focus after capacity in the Seaway pipeline was reduced.
Brent crude futures for March delivery were down 18 cents at $112.62 a barrel by 0939 GMT, underpinned by positive economic activity data from China and the eurozone. A stronger dollar was applying downward pressure to offset this.
"Brent continues to trade sideways - we have moved gradually higher since the beginning of the week, but oversupply is still hampering moves to the upside," said Carsten Fritsch, oil analyst at Commerzbank in Frankfurt. "However, the Chinese PMI data will help maintain the upwards move."
U.S. crude was up 37 cents at $95.60, rebounding from a 1.5 percent fall on Wednesday after a cut in the flow rate in the Seaway pipeline, raising fears of further stock builds at delivery point Cushing, Oklahoma.
"Overall the mood in Brent is cautiously positive but some concern has crept into the WTI market, which will keep the focus on the EIA inventory data coming out this afternoon," said Ole Hansen, head of commodity strategy at Saxo Bank.
Growth in China's factory sector accelerated to a two-year high in January, HSBC's flash purchasing managers' index showed, suggesting the country's economy was rebounding and demand for commodities such as oil should pick up.
"We're expecting the second quarter to be better than the first in terms of GDP growth in China," Natalie Rampono, a commodities analyst at ANZ said. "Given that the data was better than expected, the markets could move higher in the rest of the day."
China's oil demand could grow by more than 7 percent to 11.3 million barrels per day (bpd) this year, she added.
The eurozone also took a step closer to recovery with Markit's Flash Composite Eurozone Purchasing Managers' Index jumping to 48.2 in January from December's 47.2, smashing expectations for a rise to 47.5.
SEAWAY PUMP RATE CUT
The market will be closely eyeing U.S. crude oil inventory levels after Wednesday's surprise news that the Seaway pipeline, which takes crude from Cushing to the U.S. Gulf Coast, had cut its crude flow by more than half to 175,000 barrels per day (bpd).
"That has returned the focus to Cushing where the storage levels are still ballooning and it will slow the progress in getting the levels at Cushing reduced," said Saxo Bank's Hansen.
Earlier this month the pipeline expanded its capacity to 400,000 bpd. This raised expectations that the excessive builds at Cushing would be gradually drawn off.
Fritsch said the drop in flows had thrown this into doubt. "We have to see how long this reduction in pipeline capacity will be maintained - whether it will go on for a few days or whether it will take longer."
The spread between the Brent and the WTI contracts widened out after the news by almost $2 a barrel to close at $17.57 on Tuesday. It is currently trading at about $16.98 a barrel.
WTI could come under renewed pressure if data from the U.S. Energy Information Administration, released later on Thursday, show a bigger than expected rise in crude stockpiles.
"Crude supply across the United States will be maintaining a substantial surplus, one that could be poised for further expansion as more U.S. refineries begin curtailing operations for maintenance in the coming weeks," said analysts at Jefferies Bache.
U.S. crude inventories rose 3.2 million barrels in the week to January 18, data released on Wednesday by the American Petroleum Institute showed. Analysts were expecting a 1.8 million barrel build, a Reuters poll showed.