Oil prices pare gains on stronger $, weak Japan data

Oil prices rose by more than 25% in late August after a slowing rig count and a reduction in US crude stocks

Oil prices pared gains on Friday after the dollar rose on expectations the United States could still raise interest rates this year and after analysts from Standard & Poor's ratings cut their oil price assumptions.

Weak consumer data from Japan also weighed on price and analysts said that the slowing global economic outlook meant that oil prices would likely remain low for months to come.

Globally traded Brent futures were at $48.33 per barrel at 0940 GMT, up just 16 cents from their last close and erasing earlier Friday gains.

US West Texas Intermediate (WTI) futures were at $45.27 a barrel, up 36 cents.

Oil prices rose by more than 25 per cent in late August after a slowing rig count and a reduction in US crude stocks implied a tightening North American market and an easing of the global oil glut.

But S&P analysts noted that marginal production costs in places such as the United States were poised to fall due to improved drilling efficiencies, meaning production will not decline as steeply as expected.

"The decline in oil price assumptions represents the prospects of a more prolonged recovery," said S&P analyst Thomas Watters.

"Despite 2015 capital spending cuts of 30-40 per cent by many US exploration and production companies and prices that are lower than many producers' all-in drilling and production costs, there has not been a significant decline in oil production." S&P cut its Brent and WTI forecasts by $5 to $50 per barrel and $45 per barrel respectively for this year and said it saw 2016 prices at $55 for Brent and $50 for WTI.

The US dollar index was up 0.5 per cent, also weighing on oil prices after US Federal Reserve Chair Janet Yellen suggested the central bank is still on track to raise interest rates later this year.

Japan's core consumer prices marked the first annual drop since the central bank deployed its massive stimulus programme over two years ago, casting further doubt on whether money printing can accelerate inflation to its two per cent target.

HSBC said that markets had focused too much on China's slowdown, warning that many developed economies were faltering.

"It turns out that developed market imports haven't been anywhere near as robust as relatively upbeat local demand data would suggest ... For all their recent swagger, developed markets are hardly firing on all cylinders. So, don't just blame China," the bank said on Friday.

ANZ bank said that "risks of further downgrades to emerging market economic growth will weigh on investor sentiment and keep any interest in commodities sidelined," adding that it expected WTI to fall by 10 per cent within the next three months and Brent to drop three per cent.

In relatively bullish news, China's refined fuel stocks fell 7.82 per cent, implying strong demand due to two months of consecutive price cuts. Demand was also bolstered by the resumption of coastal fishing and the approaching harvest.