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Oil turns higher on strong U.S. factory growth

5:46pm EDT

By Robert Gibbons

NEW YORK (Reuters) – Oil prices turned higher on Tuesday after data showing the U.S. manufacturing sector expanded in April at its fastest pace in 10 months eased concerns about slowing economic growth.

The supportive U.S. factory data from the Institute of Supply Management (ISM) helped send U.S. crude to its highest settlement in five weeks and boosted equities, sending the Dow to its highest level since December 2007. .N

Technical buying kicked in after U.S. crude moved above the 50-day moving average at $105.21 a barrel. Crude had hit formidable resistance at that level in recent sessions.

“The ISM data pushed crude up and strong equities are helping, and when crude moved above the 50-day moving average that triggered some technical buying,” said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

Earlier data showing China’s official purchasing managers’ index (PMI) rose in April limited losses related to worries about sputtering U.S. and euro-zone economic growth.

Brent June crude rose 19 cents to settle at $119.66 a barrel, after two weaker closes, having swung from $118.80 to $120.02. U.S. June crude gained $1.29 to settle at $106.16, its highest close since March 27.

Total U.S. crude trading volume outpaced Brent’s and exceeded its 30-day average by 5 percent. Brent’s turnover was 23 percent under its 30-day average as a holiday that shut markets in much of Europe and Asia helped limit volumes.

U.S. RBOB gasoline futures fell more than 2 cents, with the June contract in the front-month spot after the expiration of the May contract on Monday. Heating oil closed less than a penny higher.

U.S. gasoline demand fell last week from the previous week and was down 5.6 percent from a year ago, even with lower prices at the pump, MasterCard said in a report.

BRENT/U.S. CRUDE SPREAD NARROWS

The Brent/U.S. crude spread narrowed, leaving Brent’s premium at $13.50 a barrel. The possibility of another pipeline reversal to alleviate a glut in Midwest crude supplies may have helped narrow the spread, brokers and traders said.

Marathon Petroleum Corp (MPC.N: Quote, Profile, Research, Stock Buzz) said in its earnings conference call it is considering all options for the Capline crude oil pipeline running from Louisiana to the U.S. Midwest.

But the CEO later said in an interview with Reuters the need to supply one of its Midwest refiners via Capline may prevent a reversal.

Last month’s news of a plan to reverse the flow of the Seaway oil pipeline by mid-May, ahead of schedule, helped sharply reduce Brent’s premium to U.S. crude.

EXPANDING FACTORY SECTORS

The ISM said its U.S. factory activity index rose to 54.8 in April, against expectations for a decline. Readings above 50 signal expansion while those below 50 point to contraction.

ISM’s gauge of employment also rose, to its highest since last June, a strong number arriving ahead of the U.S. April nonfarm payrolls report due on Friday, which is forecast to show the economy added 170,000 jobs.

China’s official PMI reached 53.3 in April, up from 53.1 in March. But that boost fell short of expectations and the National Bureau of Statistics noted many industries remained weak, among them chemicals, autos and oil refining.

OIL SUPPLY PICTURE

U.S. crude oil stocks rose 2 million barrels last week, the industry group American Petroleum Institute (API) said, less than expected. Gasoline stocks fell 3.9 million barrels and distillate stocks fell 4.2 million barrels.

Ahead of weekly inventory reports, a rise of 2.5 million barrels for crude, a sixth consecutive build, was forecast in a Reuters survey of analysts.

Gasoline stocks were expected to have fallen 800,000 barrels, along with distillate stocks sliding 200,000 barrels.

The U.S. Energy Information Administration’s inventory report will follow on Wednesday at 10:30 a.m. EDT (1430 GMT).

OPEC production in April hit its highest level since 2008, a Reuters survey found on Monday. Increased output from Iraq, Saudi Arabia and Libya more than offset shrinking Iranian supply ahead of a European Union embargo on Tehran’s oil set for July, the survey said.

Tensions over Iran’s disputed nuclear program and the potential for supply disruption helped boost oil prices in the first quarter. But revived talks between Iran and major powers in April and more negotiations set for late May have allowed some deflation of the geopolitical fear premium.

(Additional reporting by Gene Ramos in New York, Peg Mackey and Zaida Espana in London and Florence Tan in Singapore; Editing by Dale Hudson, Bob Burgdorfer and Jim Marshall)

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