Brent rises above $95 after China PMI, but glut caps gains

By Manolo Serapio Jr

SINGAPORE (Reuters) - Brent oil futures edged up above $95 a barrel on Wednesday as a positive Chinese factory survey helped the crude benchmark start October firmer after it fell to its weakest level since 2012 in the previous session.

Concern over growing oil supply and the dollar's strength pushed Brent down by more than $2 on Tuesday in its biggest single-day drop since January and the same factors are likely to keep a lid on any price recovery.

Chinese manufacturing activity steadied in September, with the government's Purchasing Managers' Index unchanged at 51.1, a tad higher than market forecasts, offering some relief to investors worried about the slowdown in the world's No. 2 economy.

"It's a tiny bit better than the market expected, but the China bears have been beating their chest very loudly in the past few weeks so we should see some relief rally," said Ben Le Brun, market analyst at OptionsXpress in Sydney.

Brent oil for November delivery was up 46 cents at $95.13 a barrel by 0450 GMT. The contract fell $2.53 to settle at $94.67 on Tuesday, after touching a session low of $94.24, its weakest since June 2012.

U.S. November crude gained 41 cents to $91.57 per barrel after sliding $3.41 in the previous session, its biggest daily drop since November 2012.

Both Brent and West Texas Intermediate crude ended the third quarter with their steepest quarterly loss in more than two years. Brent's premium to WTI stood at just over $3.50 on Wednesday after falling as low as $2.47 on Tuesday, the narrowest since August 2013.

OPEC CUT?

Also helping investor sentiment was news that China had cut mortgage rates and downpayment levels for some home buyers for the first time since the 2008 global financial crisis, a step to boost a sagging housing market that has been a drag on the economy.

China, the world's second-biggest oil consumer, is targeting economic growth of around 7.5 percent this year, a goal that economists say may be at risk unless the government rolls out more stimulus measures to counter signs of a slowdown.

But Le Brun said worries over a supply glut will keep price gains in check unless the Organization of the Petroleum Exporting Countries (OPEC) moves to cut output.

OPEC oil supply jumped to its highest in almost two years in September, a Reuters survey found, due to a further recovery in Libya and higher output from Saudi Arabia and other Gulf producers.

"Ultimately, if we see oil prices continue to fall with WTI under $90 and Brent close to $90, OPEC would probably start to get an itchy trigger finger (and proceed with an output cut)," said Le Brun.

Morgan Stanley analysts said in a note that unless OPEC cut output, "crude markets will remain oversupplied and risk selling off into expiry (of contracts), at a minimum".

"OPEC should eventually provide support, but less so in the short run," the analysts said, adding that OPEC's tendency to be reactive on prices rather than proactive limits its effectiveness in the short term.

Some OPEC members have voiced concern over the drop in prices and its meeting on Nov. 27 in Vienna is likely to see a debate on whether output needs to be reduced. A production cut would be the group's first formal reduction since the 2008 financial crisis.

(Reporting by Manolo Serapio Jr.; Editing by Alan Raybould)