Oil prices fall on rising Middle East output, Asia demand concerns

By Henning Gloystein

SINGAPORE (Reuters) - Oil prices fell over 1 percent on Wednesday as production from major Middle East exporters was expected to remain high or even increase just as concerns over the state of China's economy weighed on its fuel demand outlook.

Brent crude futures were trading at $49.29 per barrel at 0649 GMT, down 60 cents, or 1.2 percent, from their last settlement.

U.S. crude futures were down 51 cents, or 1.04 percent, at $48.59 a barrel.

Traders said that the falls were a result of the prospect of rising output from Middle East members of the Organization of the Petroleum Exporting Countries (OPEC), which meets this week to discuss market policy.

Most analysts said OPEC will continue to focus on defending market share instead of propping up prices by controlling output.

"Many OPEC members ... have plans to grow, so cutting supply now may interfere with those objectives," Morgan Stanley said.

Many Middle East oil producers have ramped up their supplies to Asia in an aggressive fight for market share.

But on the demand side, Morgan Stanley said it was worried about China.

"Our economists worry that April data showed China may be slowing ... The oil demand data from China should reinforce those concerns," the bank said.

China's official factory activity gauge expanded only marginally in May, data showed on Wednesday, while a private survey showed conditions deteriorated for a fifteenth straight month.

Analysts at BMI Research said Chinese port congestion and the impending refinery maintenance season will also weigh on crude imports over the next few months."

Barclays said there were also signs of "investor fatigue" in oil markets following months of heavy inflows.

A Reuters poll showed that most traders expect only limited potential for further price gains this year.

Despite this, oil prices have risen over 20 percent, or almost $10 per barrel, since early April, largely because of supply disruptions across the globe, and especially in Africa and Canada, and as overall demand remains strong despite China's slowing economy.

In the United States, the world's top oil consumer, demand increased by 2 percent in March, compared to the same month last year, to 19.6 million barrels per day (bpd), the highest seasonal level since 2008, according to Barclays.

As a result of a looming supply deficit, consultancy Energy Aspects said it expected the crude forward curve to flip into backwardation in the fourth quarter of the year, when prices for future delivery are below those for prompt delivery.

The current crude curve for Brent is in slight contango, reflecting ongoing oversupply, in which prompt prices are below those for future delivery.

(Reporting by Henning Gloystein; Editing by Joseph Radford and Sunil Nair)