Oil rises to $105 on lower China inflation

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Brent crude oil rose above $105 per barrel on Tuesday, rallying from an eight-month low after China's inflation slowed, giving it room to keep monetary policy easy and support oil demand in the world's second-biggest consumer.

Oil prices were also underpinned by worries over increasing tension in North Korea and a stalemate in talks between Iran and Western nations, raising fears of a possible disruption to fuel supplies from the Middle East.

But investors were worried that faltering global growth and deep recession in parts of Europe will cap energy demand at a time of increasing global supply, keeping a lid on oil prices.

Brent futures for May rose 40 cents to $105.06 per barrel by 1205 GMT, after moving in a $2 range and finishing 0.5 percent higher in a choppy session on Monday. U.S. crude futures rose 14 cents to $93.50 per barrel.

"The oil price fall has been excessive and some traders see a buying opportunity," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

"But with oil stocks so high, supply improving and the outlook for oil demand so uncertain, there seems to be little basis for a strong, sustained rally."

China's annual consumer inflation eased to 2.1 percent in March from 3.2 percent in February, while producer price deflation deepened, data showed on Tuesday.

"Softer-than-expected inflation is supportive to oil markets," said Ben Le Brun, analyst at OptionsXpress in Sydney.

Brent has fallen from a peak above $119 at the beginning of February, with nearby North Sea crude futures bearing much of the pressure as investors switched into other assets.

CONTANGO

The prompt Brent futures contract slumped last week to a discount below the second month for the first time in nine months, throwing the front of the price curve into "contango".

Brent's premium over U.S. light crude, also known as West Texas Intermediate or WTI, has also narrowed to about $11 from $23 over the last two months.

Analysts say the Brent-WTI spread could narrow further as European concerns weigh on Brent, while the start-up of a new pipeline will alleviate a glut of crude at the Cushing, Oklahoma, hub for U.S. oil, and keep the U.S. crude contract well supported.

Political tensions may keep prices elevated.

North Korea has nearly closed its last major project with its southern neighbour, fuelling speculation it may test a nuclear weapon or launch a missile, in a crisis that has become one of the most serious since the Korean War ended in 1953.

Iran's dispute with the West over its nuclear programme showed no signs of dissipating as weekend talks ended without a resolution, although Western diplomats said there were enough grounds to continue the dialogue.

"Any potential for war with North Korea, as well as the festering Iran issue, will keep a floor under the oil price," said Le Brun.

Oil markets await U.S. inventory data for the week ended April 5. Data last week showed an inventory build last seen in 1990, dragging oil prices down to an eight-month low on Friday.

A Reuters analysts' survey showed crude stockpiles were expected to rise by 1.5 million barrels.

Data from the American Petroleum Institute is due on Tuesday, while the Energy Information Administration will release its data on Wednesday. (Additional reporting by Ramya Venugopal in CHENNAI, India; editing by William Hardy)



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