Oil down as US-China trade fears outweigh inventory drop

LONDON: Oil prices fell on Thursday, reversing earlier gains, as an escalating trade battle between the United States and China counteracted upward pressure from a surprise decline in US crude inventories.

Heightened tensions between the world's two biggest economies have clouded the outlook for global growth, which influences oil demand expectations. Global equity markets were hit.

Brent crude oil futures were at $70.01 a barrel by 1214 GMT, down 36 cents from their previous settlement and heading for their second consecutive weekly loss.

Brent had briefly erased earlier losses, only to dip again in European afternoon trading.

US West Texas Intermediate (WTI) crude futures were at $61.64 per barrel, down 48 cents.

"Oil has been following equities' moves, but the fundamentals remain strong for oil," said Bjarne Schieldrop, chief commodity analyst at Swedish bank SEB. "Supply-side issues are bigger that those due to demand growth worries."

US President Donald Trump said on Wednesday that China "broke the deal" in trade talks with Washington and would face stiff tariffs if no agreement is reached.

Higher tariffs are set to take effect on Friday, during Chinese Vice Premier Liu He's two-day visit to Washington which starts Thursday.

"The oil market has come under renewed pressure this morning, with the hope of a China/US trade agreement fading," ING said in a note.

"However, fundamentally the oil market remains constructive, with the global balance tightening, and the potential for a number of supply-side risks (remaining)."

Oil prices have had some support from signs of tighter global supply on the back of production cuts by the Organization of the Petroleum Exporting Countries and allies including Russia.

Brent and WTI have risen more than 30 percent so far this year.

Supplies have also been tightened by US sanctions on OPEC members Venezuela and Iran.

China's crude oil imports in April surged to a record despite refinery maintenance outages and tepid domestic fuel demand, customs data showed, as state-run refiners built up stocks of Iranian crude oil.

An unexpected drop in US crude inventories also kept price declines in check. US crude oil stocks fell by 4 million barrels in the week to May 3, the Energy Information Administration said on Wednesday.

Barclays raised its third-quarter price forecasts for Brent and WTI by $4 per barrel to $74 and $67 respectively on expectations of tighter market conditions.