Oil prices tumbled 7 percent on Tuesday and Brent futures fell back below $50 a barrel as weak Chinese manufacturing data revived concerns about global demand for petroleum.
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China's official Purchasing Managers' Index (PMI) dropped to 49.7 in August from 50.0 in July, reinforcing fears about slowing growth. Oil prices retreated after a three-day rally of more than 20 percent.
"It was primarily the China fear factor," Carsten Fritsch at Commerzbank in Frankfurt told the Reuters Global Oil Forum.
In another sign of faltering economic activity, data showed U.S. manufacturing sector growth slowed in August to its weakest pace in more than two years.
The CBOE's crude oil volatility index <.OVX> rose by nearly 10 percent intraday on Tuesday, trading at its highest since March.
On Aug. 24, Brent fell to a 6-1/2-year low at $42.23 intraday as plunging Chinese equities markets battered global markets.
On Monday, Brent climbed $4.10, or 8.2 percent, extending its rally to a third day as oil prices recovered from their lowest levels since the global financial crisis.
Monday's rally was fueled by U.S. Energy Information Administration (EIA) data showing revised U.S. oil output peaked at just above 9.6 million barrels per day (bpd) in April before falling by more than 300,000 bpd over the following two months.
"Even with the EIA revision, we're still producing over 9 million barrels per day, so I'm not convinced we've seen the fundamental shift to justify the rally," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
Some traders on Monday said oil prices got a lift from a commentary in the OPEC Bulletin publication suggesting the group is more willing to talk to non-OPEC producers about curbing output, even though it was broadly in line with previous comments.
A weaker dollar index <.DXY> provided no support for oil on Tuesday. The dollar's weakness often supports dollar-denominated commodities because they are less expensive for consumers using other currencies.
Investors awaited fresh snapshots of U.S. oil inventories due from industry and government starting with the American Petroleum Institute's report at 4:30 p.m. EDT on Tuesday.
Crude oil and gasoline stocks were expected to have fallen last week, according to Reuters survey of analysts. [EIA/S]