Oil falls on weak China factory data

By Christopher Johnson

LONDON (Reuters) - Oil prices fell sharply on Tuesday after official data showed China's giant manufacturing sector, one of the main engines powering the world's biggest energy consumer, contracted at its fastest pace in three years.

China's official Purchasing Managers' Index (PMI) dropped to 49.7 in August from 50.0 in July, reinforcing concerns over the world's second-largest economy.

The figures helped spur a retreat in oil prices after three days of hefty gains. Investors took profits after Brent and U.S. crude both soared more than 8 percent on Monday, traders said.

"It was primarily the China fear factor," Carsten Fritsch at Commerzbank in Frankfurt told Reuters Global Oil Forum.

Benchmark Brent crude dropped $2.45 to a low of $51.70 a barrel before bouncing to trade around $53.10 by 1040 GMT. On Monday, Brent climbed $4.10, or 8.2 percent, extending a rally from a 6-1/2-year low at just above $42 on Aug. 26.

U.S. crude was down 75 cents at $48.45 a barrel. It settled up $3.98, or 8.8 percent, in the previous session.

Oil prices rallied from their lowest levels since the global financial crisis after figures from the Energy Information Administration (EIA) pointed to lower-than-expected U.S. oil production.

Revised EIA data published on Monday showed U.S. domestic oil output peaked at just above 9.6 million barrels per day (bpd) in April before falling by more than 300,000 bpd over the following two months.

But, despite the lower U.S. production, the global market is still heavily oversupplied.

Oil producers in the Organization of the Petroleum Exporting Countries are pumping 2-3 million bpd more than required, forecasters say, and oil stockpiles are filling.

A Reuters oil price poll on Tuesday forecast Brent would average $62.30 a barrel in 2016, down $6.70 from projections a month earlier.

Bank of America Merrill Lynch said it was lowering its 2016 and 2017 crude oil projections because balances looked soft and oil production costs were falling:

"Growth concerns around China, coupled with the expectation of increased Iranian output in 2016, have temporarily driven oil prices even lower than we anticipated," Merrill Lynch said.

Global demand is also faltering in some regions.

Monthly surveys show manufacturing struggling across Asia: an 11th successive contraction in Indonesia, a sixth contraction in South Korea and the weakest reading in nearly three years in Taiwan. Activity in India also slowed from July.

Investors awaited U.S. data, including oil stocks, manufacturing and vehicle sales, due later on Tuesday.

(Additional reporting by Keith Wallis in Singapore; Editing by Dale Hudson)