SINGAPORE, Feb 20 (Reuters) - Brent crude edged down toward $117 a barrel on Wednesday on the prospect of more Saudi supply, while optimism about the U.S. and Chinese economies lifted fuel demand outlook in the world's two largest oil consumers and underpinned prices.
Saudi Arabia, the world's top exporter of crude oil, expects to raise its output in the second quarter to satisfy higher demand from China and drive economic recovery elsewhere, oil industry sources said, but the exact rise in volume was unclear.
April Brent crude futures fell 15 cents to $117.37 a barrel by 0744 GMT after posting their first gain in four sessions on Tuesday. U.S. crude for March edged up 5 cents to $96.71. The contract expires later on Wednesday.
The news "is bearish because Saudi Arabia is raising crude output during a lower demand season", Yusuke Seta, a commodity sales manager at Newedge Japan said, referring to peak refinery maintenance in the second quarter.
Saudi Arabia's move to cut output sharply by about 700,000 barrels per day (bpd) in the last two months of 2012 had helped tighten supply and supported oil prices along with better fuel demand growth prospects in the U.S. and China, analysts said.
"Brent may be setting up for a modest second-quarter correction, as many of the drivers supporting the North Sea market will begin to fade in the spring," Adam Longson, Morgan Stanley analyst said.
Crude supply is expected to improve in the second quarter due to refinery maintenance in Asia and Europe, and as the United States continue to displace imports with rising domestic production, he said.
Supply is also rising in the United States, where weekly oil inventories data is expected to show a build in crude stockpiles, which can be bearish for prices. Refined product inventories were expected to have declined.
A supply glut in the U.S. Midwest will persist as oil shipments on the Seaway pipeline between the U.S. Midwest and the Gulf Coast will run below daily capacity of 400,000 barrels.
The pipeline was expanded this year as operators had aimed to divert crude from bloated tanks in Cushing, Oklahoma, the delivery point for West Texas Intermediate (WTI). Despite the problems, U.S. crude futures settled up 80 cents on Tuesday.
"I just don't know why it's so strong. It seems strange to me, with all these problems at Seaway," Tony Nunan, a risk manager at Mitsubishi Corp, said.
Strength in U.S. economic data due later this week could whet investors' appetite for riskier assets such as equities and oil. Bullish sentiment in the U.S. equities markets rubbed off on oil on Tuesday, leading both benchmarks to close up.
"China looks better now and the U.S. economy is going to stabilise. But European numbers are worse," Nunan said.
France is expected to miss its economic growth target this year while Italy's election next week has added to investor worries about the outlook for the euro zone.
Investors are also watching the outcome of Iran's nuclear talks with major world powers next week although analysts do not expect any breakthrough until after Iran's elections in June.
"It's probably neutral to bullish for oil markets," Nunan said. "Oil can stay strong because of geopolitical risks that are inherent in the system, but I think it's kind of overdone again." (Editing by Himani Sarkar and Tom Hogue)
