Oil steadies as China worries counter supply cuts

Brent crude futures slipped 35 cents to $86.46 a barrel by 1027 GMT

(Reuters) - Oil prices stabilised on Monday as investors weighed concerns about China's faltering economic recovery and a stronger dollar against seven weeks of gains on tightening supply from OPEC+ output cuts.

Brent crude futures slipped 35 cents to $86.46 a barrel by 1027 GMT while U.S. West Texas Intermediate crude edged lower by 38 cents to $82.81 a barrel.

"Crude has been in overbought territory for some time now, defying expectations of a correction. It has been singularly focused on U.S. economic optimism, to the exclusion of the increasingly stronger headwinds blowing in the eurozone and China," said Vandana Hari, founder of oil market analysis provider Vanda Insights.

"A rebalancing is overdue but it may need a reality check in the markets stateside," Hari said.

Oil may be range-bound this week as China's sluggish economic recovery and a stronger U.S. dollar could depress prices, but OPEC+ has indicated it would do whatever it takes to tighten supply and stabilise markets, CMC Markets analyst Tina Teng said.

Earlier in the session prices dipped about 1% as the U.S. dollar index (.DXY) extended gains after a slightly bigger increase in U.S. producer prices in July lifted Treasury yields despite expectations the Federal Reserve is at the end of hiking interest rates.

A stronger dollar pressures oil demand by making the commodity more expensive for buyers holding other currencies.

Meanwhile, supply cuts by Saudi Arabia and Russia, part of the alliance between the Organization of the Petroleum Exporting Countries and their allies, or OPEC+, are expected to erode oil inventories over the rest of this year, potentially driving prices even higher, the International Energy Agency said in its monthly report on Friday.

Last week’s encouraging demand estimates, falling OPEC supply, declining inventories and mitigated inflationary pressure, said Tamas Varga of oil broker PVM, "is a warning signal that unless China joins the party the path upwards will be paved with pitfalls".