Oil slips as strong supply offsets economic optimism

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Brent crude oil stayed below $112 per barrel on Wednesday, as a slightly more optimistic outlook for the global economy was offset by increasing supply from the United States.

Front-month Brent futures shed 18 cents to $111.76 per barrel at 1136 GMT, after adding 54 cents on Tuesday. U.S. crude was trading down 15 cents at $93.00 per barrel.

Alcoa, the largest aluminum producer in the United States, said late on Tuesday it was optimistic demand for the metal would continue to grow in 2013, as it posted in-line profit and beat expectations on revenue.

"Some industrial data was better than expected which is positive for potential crude demand, but it's not building on gains as a lot still needs to be worked out in Europe," said Sucden Financial research analyst Jack Pollard.

Moves were muted as investors awaited Chinese trade data, more U.S. corporate earnings and the outcome of a European Central Bank policy meeting for insight on prospects for the world's largest economies.

China, the world's biggest energy consumer, will release its December trade figures on Thursday and fourth-quarter economic growth numbers on Jan. 18.

Reuters polls predicted that the trade numbers may show marginal improvement in the economy, although weak U.S. and European demand may weigh on exports. Economic growth may have accelerated, ending seven quarters of weaker expansion.

BANK-WATCH

The Bank of England and ECB policymakers begin two-day meetings on Wednesday and investors will be looking for hints that the ECB may lower interest rates in 2013 to pull the regional economy out of recession.

Weighing on prices, the U.S. Energy Information Administration (EIA) said on Tuesday that the country's crude oil production will rise by the largest amount on record in 2013, and is set to soar by a quarter over two years.

The rapid increase underscores how improvements in horizontal drilling and hydraulic fracturing technology - commonly referred to as 'fracking' - have transformed the energy market in the last five years, allowing producers to tap shale oil from tight rock formations.

Olivier Jakob, analyst at Petromatrix in Zug, Switzerland said that the increased supply of oil from the United States could force other producers to cut supply if they want to maintain prices above $100 per barrel.

"Unfortunately for Saudi Arabia, its current oil price target is at a level that does not stimulate demand hence OPEC will be forced in 2013 to cut production to accommodate the higher U.S. production levels," he said.

Adding to the pressure, the American Petroleum Institute (API) said crude stocks rose 2.4 million barrels last week, beating analysts' expectations of a 1.5 million barrel increase.

The increase was largely due to a 1.2 million barrel per day jump in crude imports, API said.

U.S. crude futures slid while Brent rose in the previous session when the annual rebalancing of the S&P GSCI commodity index kicked in, prompting index funds to adjust their portfolios.

The rebalancing, announced in early November, will increase the index's holdings of Brent and reduce holdings of WTI as the output of Brent-related grades wanes and U.S. crude output surges.

The passive index rolls its holdings between the fifth and ninth trading days of the month. (Additional reporting by Ramya Venugopal in Singapore; editing by Erica Billingham and Keiron Henderson)



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