Concerns over Chinese bank credit emerged on Tuesday, after ratings agency Moody's said China's local government debt may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, potentially threatening the credit ratings of the country's lenders. The news comes days after data showed China's factory sector grew at its slowest pace in 28 months in June, fuelling fears of a drop in demand from the world's second largest oil consumer.

China's fledgling services sector also fell slightly in June but still pointed to solid business expansion as new order growth quickened to an eight-month high, a report on Tuesday showed.

In Europe, the market's initial optimism over euro zone policymakers' approval of an emergency bailout for Greece was tempered by Standard & Poor's negative view on the private sector involvement in a second Greek bailout package.

"There's been a good flow of economic data that has helped oil prices and if that can continue this week we can expect more upside," said Ben Le Brun, market analyst with CMC Markets in Sydney. "But there are concerns still there, including the U.S. debt ceiling and also the softer Chinese data."

DATA, RISKS, TECHNICALS

U.S. Treasury Secretary Timothy Geithner has warned of huge risks if Congress fails to raise the $14.3 trillion debt ceiling by Aug. 2, potentially triggering a default that could send shivers through an already-fragile banking system.

Participants will be closely watching the key U.S. non-farm payrolls report due out this Friday for signs that economic growth in the world's top oil consumer has regained traction.

Weekly U.S. oil inventory data from industry group the American Petroleum Institute and the government's Department of Energy will be delayed by a day to Wednesday and Thursday, respectively, due to Monday's Independence Day holiday.

Oil prices were also depressed by a stronger U.S. dollar, which rose 0.37 percent against a basket of currencies by 0624 GMT, making dollar-denominated oil more expensive when purchased in foreign currencies.

The euro slipped from one-month highs against the dollar as the greenback was bought back broadly on a flurry of stop-loss buying and short-covering by macro-funds. The rally in equities which had helped support oil prices in recent sessions took a breather, as Asian stocks steadied near one-month highs on Tuesday after five consecutive days of gains.

According to technical charts, Brent crude needs to clear resistance at $113 a barrel before developing a decent rally towards a short-term resistance target at $121.47, while U.S. crude is expected to rise to $98.13 a barrel, says Reuters market analyst Wang Tao.

IEA RELEASE

The International Energy Agency (IEA) said on Monday it hoped a very sizeable portion of its oil stock release will be taken up by the market and the move was already adding to supplies of light, sweet crude.

The IEA, adviser to 28 industrialised countries, on June 23 said it would release 60 million barrels of oil from strategic inventories to fill the gap in supplies left by the disruption to Libya's output. The tender to sell crude oil from U.S. strategic petroleum reserves (SPR) as a part of the IEA stock release was oversubscribed by active bids.

But analysts pointed out a lack of coordination and transparency outside the United States and that the full volume of 60 million barrels may not be absorbed due to globally weak demand.

Goldman Sachs said it had become clear that the impact of the IEA's 60-million-barrel oil release would be much smaller than the initial announcement suggested. The bank expected 2011 Brent crude oil prices to fall by $6-$8 per barrel, from an earlier estimate of $10-12/bbl, it said on Friday.

In Libya, early hope that peace talks could soon end a five-month conflict that has halted the OPEC member's oil exports, and in part sparked the IEA oil stocks release, appeared to fizzle as both sides stuck to entrenched positions on the fate of Muammar Gaddafi.

Uncertainty over pan-Arab protests and Libya's conflict pushed Brent to a 32-month peak earlier this year.

Copyright Reuters, 2011