Oil gains, Middle East strife offsets Europe gloom

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Crude oil prices rose slightly on Wednesday, as concern about threats to oil supply from the Middle East offset worries about oil demand from the euro zone.

Brent crude added 4 cents to $103.46 a barrel by 1127 GMT while U.S. crude was up 22 cents to $88.72.

The euro zone's private sector shrank for a sixth month in July as manufacturing output nosedived, notably in the core countries of Germany and France, adding to fears the bloc will slump back into recession, business surveys showed on Tuesday.

German business sentiment dropped for the third month in a row in July to the lowest in 28 months, in a sign that a renewed flare-up of the euro zone sovereign debt crisis is weighing on business in Europe's largest economy.

British economic output also shrank much more than expected in the second quarter hit by the euro zone debt crisis and government austerity, official data showed.

Market participants said there was a sense that negative news was well factored in to prices.

"It seems as though all the bad news is priced in, and people are thinking things can't get much worse," said Christopher Bellew, broker at Jefferies Bache.

"I think it's more likely that we break above on the upside if there's any more worries about supply disruption in the Middle East or North Sea or positive economic data."

An improvement in China's manufacturing sector in July propped up prices but reports that the economy of the world's second biggest oil consumer was still weakening kept investors cautious.

The International Monetary Fund said China's economy is set for a soft landing and urged further reform and currency appreciation to rebalance growth and reduce risks.

SYRIA STRIFE

Keeping worries about supply risk in the spotlight, Syria sent thousands of troops towards Aleppo, where attack helicopters have been pounding rebel fighters, stepping up its assault on the country's largest city to combat a growing revolt against President Bashar al-Assad.

However, countering this concern, an unexpected rise in U.S. crude oil stocks weighed on prices.

U.S. crude stocks rose 1.3 million barrels last week, the industry group American Petroleum Institute said in its weekly report on Tuesday, surprising analysts who expected a decline.

U.S. crude oil inventories had been forecast to drop 700,000 barrels, with distillate stocks having risen 1.1 million barrels and gasoline stocks slipping 600,000 barrels, a Reuters poll taken ahead of weekly inventory reports showed. (Editing by James Jukwey)



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