Brent slips towards $109 on Fed policy concerns

By Jessica Jaganathan

SINGAPORE (Reuters) - Brent crude prices slipped towards $109 a barrel on uncertainty over when the U.S. Federal Reserve will scale back its commodities-friendly bond-buying programme, but unrest in Egypt and reduced Libyan oil product supply helped curtail the losses.

Investors are waiting on minutes from the U.S. central bank's latest policy meeting, due Wednesday, which could provide new clues on when it plans to taper its monthly $85 billion in asset purchases. Many believe tapering could begin next month.

Brent crude oil futures for October fell 69 cents to $109.21 a barrel by 0644 GMT, down more than $2 from a four-month peak of $111.53 hit on August 15.

U.S. crude oil futures for September was down 77 cents to $106.33, after earlier falling to a session low of $106.01.

"There's some book-squaring going on prior to the FOMC minutes on Wednesday as well as (ahead of) Chinese flash PMI numbers on Thursday," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

The market is well supplied, so traders are now more concerned about downside risks if any change in the Fed stimulus policy boosts the U.S. dollar, which would have a negative impact on oil prices, he said.

The HSBC China flash manufacturing PMI data will be scrutinised for further clues to demand growth in the world's second-largest oil consumer.

Supporting oil prices, U.S. commercial crude inventories likely fell last week by 1.4 million barrels, an initial poll of Reuters analysts showed ahead of the release of weekly data.

Industry group API is set to release its stockpile report on Tuesday at 2030 GMT. The U.S. Energy Information Administration issues its data on Wednesday at 1430 GMT.

MIDDLE EAST UNREST

Egyptian security forces have arrested the top leader of the Muslim Brotherhood, state media reported on Tuesday, pressing a crackdown on his group.

Almost 900 people, including more than 100 soldiers and police, have been killed since last week in clashes pitting the followers of deposed Islamist President Mohamed Mursi against the army-backed government.

Egypt is not a major oil producer, but investors worry that unrest there could spread throughout the Middle East, which pumps more than a third of the world's oil.

"There's already a risk premium built in for Egypt so I think overall the position of the market is downward," Spooner said. "There will probably only be more risk premium added into prices if there are possible moves to threaten cargo moves in the Suez canal or the pipeline."

Libya was forced to suspend contractual obligations with a force majeure on some oil exports on Monday, acknowledging weeks of disruption which has cut shipments to their lowest since the civil war of 2011.

About half of Libya's over 1.2 million barrel per day export capacity remains shut down, industry sources said.

"The price impact has been so muted because markets, while well aware of the Libyan crude outages, are also well aware that we are heading into a period of seasonally decreasing refinery crude runs," wrote Michael Wittner from Societe Generale Group in a research note on Tuesday.

Societe Generale will maintain a Brent price forecast of $111 in the third quarter, $109 in the fourth quarter and $110 in 2014, Wittner said.

Goldman Sachs said on Monday it expected tighter oil markets to propel Brent to $115 in the near term.