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Oil retreats, dragged by weak Europe economy data

U.S. crude for April was down 60 cents to $105.69 a barrel. The March contract, which expired on Tuesday, closed at $105.84 a barrel, the highest settlement for front-month NYMEX crude since May 4.

The euro zone’s service sector shrank unexpectedly this month, reviving fears that the economy could sink into recession, Markit’s Eurozone Services Purchasing Managers’ Index showed on Wednesday.

China’s manufacturing sector contracted in February for a fourth straight month as new export orders dropped sharply in the face of the euro area debt crisis, stirring fears about fuel demand in the world’s second-largest oil user.

Evidence that the poor economic situation is having a direct impact on the fuel market came from Singapore Airlines, which cut its cargo capacity by 20 percent as persistent weakness in demand and high jet fuel prices piled pressure on its profitability. ¨ûID:nL4E8DM5HD

However Brent was not far off nine-month highs, and investors were still upbeat on the outlook for oil.

“There’s relatively little responsiveness to negative data, and there is not a huge appetite to take a bearish stance,” said Nick MacGregor, an oil analyst at Redmayne Bentley.

“There’s an underlying sense that between the geopolitical concern and the potential for a resurgent U.S. economy, data would have to be pretty grotty to have a marked impact,” MacGregor said.

The underlying outlook for China helped keep a floor under prices. Analysts expect China to step up policy easing to support growth and lift commodities demand in the world’s second-largest economy.

Commodities rallied at the start of the week after Beijing cranked up credit on Saturday by lowering the amount of cash banks must hold in reserves.

Iran premium

Supply concerns about disruptions from Iran have boosted oil in the past month as tightening U.S. sanctions make it tough for buyers to keep doing business with OPEC’s second-largest producer.

Asian and European buyers of Iranian crude are cutting purchases. Top Asian consumers of Iranian oil - China, India and Japan - expect cuts of at least 10 percent in Iranian crude imports this year.

Crude output in Sudan, Yemen, Syria and the North Sea is also lower, hurt by differing political and production issues.

“Upside price risks are rising as the market finds itself in the unprecedented situation in which OPEC spare capacity is at a trough just as a world economic recovery is gaining momentum,” Goldman Sachs analysts said in a note.

The U.N. nuclear watchdog expressed disappointment on Wednesday over a lack of progress during two days of talks in Tehran over Iran’s disputed nuclear programme and said its request to visit a military site had not been granted.

Investors’ attention will later turn to the outlook for supply in the United States. The American Petroleum Institute is due to release a report on Wednesday at 2130 GMT. The Energy Information Administration will follow with its own data on Thursday at 11 a.m. EST.