Oil prices slide as tepid Chinese demand counters US output concerns

By Arunima Kumar

(Reuters) -Oil prices edged lower on Tuesday, as fears of weaker demand in China weighed on market sentiment, while focus turned to the U.S. Federal Reserve's policy meeting that concludes on Wednesday.

Providing a floor to prices were prospects of lower U.S. crude stockpiles and concerns over U.S. production in the aftermath of Hurricane Francine.

Brent crude futures for November were down 48 cents, or 0.66% to $72.27 a barrel, as of 1002 GMT. U.S. crude futures for October slipped 37 cents, or 0.53%, to $69.72 a barrel.

"Oil prices have been in recovery mode since Wednesday, perhaps on supply concerns after Hurricane Francine in the U.S. Gulf of Mexico, as well as expectations of lower U.S. crude stockpiles," said Charalampos Pissouros, senior investment analyst at brokerage XM.

"That said, prices are pulling back today, perhaps as participants considered the aforementioned developments as temporary variables in the oil equation, remaining worried about weakening global demand, especially in China."

In China, oil refinery output fell for a fifth month in August amid declining fuel demand and weak export margins, government data showed on Saturday.

Both contracts settled higher in the previous session as output remained constrained. More than 12% of crude production and 16% of natural gas output in the U.S. Gulf of Mexico remained offline due to Hurricane Francine, according to the U.S. Bureau of Safety and Environmental Enforcement (BSEE) on Monday.

The Fed is expected to start its easing cycle on Wednesday, with Fed funds futures showing markets are now pricing in a 69% chance that the U.S. central bank will cut rates by 50 basis points.

"The Fed is expected to lower interest rates for the first time in more than four years this week ... but recent weak economic data and hawkish comments by members of the Fed have led investors to believe the move could be more aggressive," Panmure Liberum analyst Ashley Kelty said.

A lower interest rate will reduce the cost of borrowing and can potentially lift oil demand by supporting economic growth.

Investors were also watching out for an expected drop in U.S. crude inventories, which likely fell by about 200,000 barrels in the week ended Sept. 13, based on a Reuters poll. [EIA/S]

(Reporting by Arunima Kumar in Bengaluru and Jeslyn Lerh in Singapore; editing by Sonali Paul, Sherry Jacob-Phillips and Jason Neely)