Brent rises above $101; China, US demand worries cap gains

By Jessica Jaganathan

SINGAPORE (Reuters) - Brent crude rose above $101 a barrel on Tuesday after recent sharp losses, but a gloomy demand outlook stemming from fears of a liquidity crunch in China and the U.S. Federal Reserve's plans to roll back its stimulus kept a lid on gains.

Oil prices have dropped more than $6 from last week's high to Monday's three-week low, following the Federal Reserve's signal that the era of cheap central bank money - which has driven global investment in commodities - was coming to an end.

The declines were exacerbated by worries over attempts by China, the world's No.2 oil consumer after the United States, to rein in excessive credit growth.

"People are more comfortable that the U.S. has hit a sustainable recovery, but China is looking worse. Still, in the U.S. even though its economy looks like it's recovering, oil demand isn't, so seems like market is fundamentally weak," said Tony Nunan, oil risk manager with Mitsubishi Corp in Tokyo.

Brent crude gained 22 cents to $101.38 a barrel by 0659 GMT, after reaching a session low of $100.70 earlier, not far from a three-week low of $99.67 hit on Monday. U.S. oil rose 14 cents to $95.32 a barrel.

"I think $100 is the support level for Brent. A lot of the oil price weakness has to do with the situation in China with the macro picture not looking good," Nunan said.

China shares pared hefty losses after earlier testing 4-1/2-year lows on Tuesday ahead of a press conference in Shanghai at which traders hope the Chinese central bank and authorities will address recent market turmoil. <.SS>

A firmer dollar after the Fed outlined a possible timeline for the central bank's winding down of its stimulus program has also piled up pressure on commodities priced in the greenback by making them more expensive for holders of other currencies.

"At the same time, bullish positioning and flows into the WTI-Brent trade are exacerbating the pressure on Brent," Morgan Stanley analysts said in a note on Monday.

WTI's discount to Brent narrowed to $5.81 a barrel on Tuesday, its smallest since November 2011, before widening to $6.06 by 0644 GMT.

U.S. oil prices, however, drew some support from news of record flooding in Canada's main oil-producing province.

Major oil Canadian pipelines that move almost 1 million barrels per day of Alberta oil sands crude, much of it bound for the United States, remained shut on Monday after a spill on a smaller line was discovered on the weekend, a spokesman for operator Enbridge Inc said.

U.S. commercial crude oil stocks likely fell two million barrels on average for the week ended June 21 due to lower imports and higher refinery activity, a Reuters poll of six analysts showed.

Growing fears Syria's civil war is dragging in other countries, with deadly bomb attacks in Iraq and fighting in Lebanon, also cushioned oil prices.

(Editing by Himani Sarkar)