Oil Slips Nearly $2 on Weak China data, Fed Plan

Oil slipped nearly $2 on Thursday, its biggest daily slide in close to three weeks, as slowing Chinese manufacturing activity unnerved investors already worried about the U.S. Federal Reserve's plan to roll back its stimulus later this year.

Commodities and equities fell across the board after data from China showed factory activity weakening to a nine-month low in June, heightening risks that a second-quarter slowdown in the world's No.2 economy could be sharper than expected.

Brent crude dropped $1.57 to $104.55 a barrel by 0651 GMT, while U.S. oil declined $1.70 to $96.54. Both posted their biggest slide in percentage terms since late May.

"There are a few factors weighing on oil today. The Federal Reserve has confirmed that they are likely to taper down asset purchases," said Lee Chen Hoay, an investment analyst at Phillip Futures. "China's latest PMI data is pointing to a slowdown in demand. As the world's second-largest oil consumer, any slowdown in demand will weigh on prices."

China's economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has underwhelmed, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for the year.

Assets priced in the dollar came under more pressure as the greenback firmed following Fed Chairman Ben Bernanke's comments that the central bank may reduce its bond-buying program, a key driver of global investment in riskier assets, with the goal of ending it in mid-2014.

"Our global strategists believe the Fed may start tapering its asset purchases in September, a potential headwind for exchange-traded commodity prices," ANZ analysts said in a note.

SLOW DEMAND

A surprise build in crude inventories in the world's top oil consumer, the United States, despite the summer driving season being underway also dragged on oil prices.

Crude stockpiles increased by over 300,000 barrels in the week to June 14, compared with a Reuters poll that forecast a 500,000 barrel decrease.

"Total gasoline stocks are some 9 percent above a year ago and remain above the top of the five-year range," analysts at BNP Paribas said in a note. "Although stocks are still expected to draw in coming weeks, they will now be doing so from a more elevated position."

Fewer drivers will take to the road during the U.S. Independence Day holiday in part due to a sluggish economy, travel group AAA said.

But oil prices may not fall much from current levels due to concerns about a disruption in supplies from the Middle East.

Investors have been worried about an escalation in violence in Syria after the United States said it plans to send U.S. weapons to Syrian rebels following proof the Syrian government had used chemical weapons against opposition forces.

Syria is not key to oil markets, but market participants fear that the civil war may escalate into a regional violence, engulfing neighbouring countries.

Brent may find support at $100 a barrel, while a near-term floor for the U.S. benchmark is $96, Phillip Futures' Lee said. (Editing by Himani Sarkar)