Oil slides, Brent/WTI unwinds as rally seen excessive

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Oil slipped on Tuesday and the spread between WTI crude and Brent widened as traders bet that the fund-fuelled rapid run-up in U.S. prices had gone too far, while some held tight ahead of a Federal Reserve meeting.

The fall of oil futures on Tuesday follows a rally in both benchmarks to multi-month highs above $109 in mid-July, which attracted bullish speculators and large hedge funds into the market. U.S. crude in particular had rallied to a 16-month high as infrastructure developments allowed oil in landlocked Cushing, Oklahoma, to flow to the U.S. coasts.

That trade has begun to unwind, with a growing consensus that expectations of tight Midwest supplies were overdone. News on Tuesday that BP would start up several more units at its revamped Whiting, Indiana, refinery also spurred selling, with speculation it may reduce demand for sweeter crude.

"It's a continuation of the bearish momentum since we peaked about two weeks ago," said Stephen Schork, the editor of The Schork Report.

Brent futures slid 68 cents to $106.77 a barrel by 1:56 p.m. EDT (1756 GMT), but was still on track for a monthly gain of nearly 5 percent, the biggest monthly rise in 11 months.

U.S. crude fell $1.70 to $102.85.

The North Sea benchmark's premium over its U.S. counterpart widened to $3.92. The gradual widening over the past five sessions follows a five-month narrowing that brought the two benchmarks to parity on July 19.

The liquidation carries with it "the potential that the decline in WTI pulls the rest of the petroleum complex down on top of it," Tim Evans, an energy specialist at Citi Futures Perspective, wrote in a research note.

Market players are holding out for clues from the Fed's two-day meeting on the fate of the U.S. stimulus program that has spurred demand in the world's top oil consumer. The Fed is due to issue a statement on Wednesday.

U.S. inventory data due from the industry's American Petroleum Institute later on Tuesday will also offer an insight. U.S. commercial crude oil stockpiles likely fell by 2.3 million barrels last week for the fifth straight week, a Reuters poll of six analysts showed on Monday.

BP Plc outlined the rest of the modernization project at the 413,000 barrel per day (bpd) Whiting refinery, saying it expects a sulfur recovery unit and a hydrotreater to come on line in the third quarter.

LONGS LIQUIDATE

As crude prices climbed throughout July, hedge funds and other large speculators piled in to the market.

"The market was really unnerved by the report Friday showing massive length," Andy Lebow, vice president at Jefferies Bache said.

"Right now the market is just liquidating. Brent is suffering from the same problem: tremendous growth in speculative length in the last few weeks. As the market moves lower, there's going to be more pressure on it as well."

Investors also fretted that the manufacturing surveys later this week might highlight weakness in China.

"The market is keeping an eye out for some catalyst to restart the rally, but as of now we really don't have it," said Gene McGillian, an analyst with Tradition Energy in Stamford, Connecticut.

Activity in China's manufacturing sector may have contracted in July for the first time in 10 months, a Reuters poll showed, signaling a protracted slowdown in the world's second-largest economy as demand at home and abroad sags.

"Chinese data along with actions by the government are clearly pointing to a slowing of the main economic and oil demand growth engine of the world," said Dominick Chirichella of Energy Management Institute.

U.S. consumer confidence pulled back in July as consumers were less optimistic about the outlook for the economy and labor market, according to a private sector report.



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