Oil drops as US supply builds and China ignites demand worries

LONDON: Oil headed for its biggest one day drop in a month on Monday on evidence of yet more growth in U.S. crude supply, although the price is still on course for its strongest January gain for 14 years.

Further weighing on oil markets, the trade dispute between the United States and China looks unlikely to end anytime soon and its impact on the Chinese economy is increasing.

Brent crude oil futures were down $1.49 at $60.15 a barrel by 1450 GMT, down 2.5 percent on the day in their largest one-day percentage fall since late December, while U.S. futures  fell $1.71 to $51.98 a barrel.

U.S. crude production, which hit a record 11.9 million barrels per day late last year, has undermined sentiment in the oil market, traders said.

U.S. energy companies last week increased the number of rigs looking for new oil for the first time since late December to 862, energy services firm Baker Hughes said on Friday.

"The increase in drilling activity in the U.S. ... is generating headwind," Commerzbank said in a note.

"Clearly the significantly lower prices in the fourth quarter are prompting shale oil producers to exercise restraint. Because prices have risen considerably since the start of the year and there is a high number of drilled but uncompleted wells, drilling activity is likely to recover soon."

Even with an uncertain outlook for demand and evidence of growing supply, the oil market has benefited this month from another round of production cuts by OPEC and its partners, as well as robust trade in physical barrels of crude led by China.

The price has risen by 12 percent so far in January, the largest increase in percentage terms in the first month of the year since 2005, when it gained 14 percent.

Investors have added to their bets on a sustained rise in the oil price this month for the first time since September, according to data from the InterContinental Exchange.

But much of the demand outlook hinges on China and whether its refiners will continue to import crude at 2018's breakneck pace.

Industrial companies in China reported a second monthly fall in earnings in December, despite the government's efforts to support borrowing and investment.

Scandinavian bank SEB said it had cut its 2019 oil price forecast to $65 a barrel from $85 previously.

"Softer demand in 2018 and softer demand growth projected for 2019 and 2020 pulls our forecast lower," the bank said.

"Stronger than expected U.S. shale oil production also adds to the lower forecasted price."