Oil pares losses after dive toward 12-year low seen too far, too fast

By Barani Krishnan and Simon Falush

NEW YORK/LONDON (Reuters) - Oil lurched to new 12-year lows before paring some losses on Thursday, with some traders betting a rout triggered by fears over China demand and swelling U.S. stockpiles had run its course, for now.

Global benchmark Brent crude fell as much as 6 percent to nearly $32 a barrel, its lowest level since at least April 2004, as another free fall in the Chinese stock market rattled investors already concerned by the world glut in crude.

But by midmorning trade in New York, Brent pared those losses as some traders took profits after prices slid nearly 14 percent in four days.

"I'll say it's oversold on a short-term basis, though I am an oil bear," said Tariq Zahir, who trades mostly longer-dated spreads in U.S. West Texas Intermediate crude futures (WTI) for the Long Island, New York-based Tyche Capital Advisors fund.

"There's covering and also some panic buying in an attempt to support WTI at above $32."

Brent was 25 cents lower at $33.98 a barrel by 12:18 p.m. EST (1718 GMT) after sliding during European trading to a low of $32.16, a level last seen in April 2004.

WTI were down 50 cents at $33.47, after hitting a low of $32.10, their lowest since late 2003.

China allowed its yuan currency to slip on Thursday, sending regional currencies and stock markets tumbling globally. Stock market trading was suspended less than half an hour after opening after sharp falls triggered a new circuit-breaking mechanism for a second time since its introduction this week.

The crash raises the risk of slowing demand from the world's No. 2 oil consumer, threatening to prolong an over year-long supply overhang.

"For sure, a minus 7 percent for oil over two days on just China, and a blowup of the whole macro trade, was not something I was expecting to see in the first two days of the year," said Doug King, fund manager in London for the $220 million Singapore-based Merchant Commodity Fund.

U.S. government data on Wednesday showed a 10.6 million-barrel surge in gasoline supplies, the biggest weekly build since 1993, rattling investors already concerned by near-record production and massive stockpiles around the world.

Prices also trimmed early losses after violence in the Middle East and North Africa offered a measure of support.

A military training centre in the Libyan town of Zliten was hit by a truck bomb, causing dozens of casualties, witnesses said, while dozens of air strikes hit the Yemeni capital Sanaa.

Oil's rapid fall has made a prediction that Goldman Sachs made last year that crude could fall as low as $20 a barrel seem less outlandish than it then seemed.

(Editing by Marguerita Choy)