Brent crude fell towards $108 per barrel on Thursday after a monthly IEA oil report dampened bullish sentiment, curbing a rise in futures originally prompted by signs the U.S. would maintain economic stimulus for now.
The North American shale oil boom could spur the biggest rise in non-OPEC supply growth in decades next year helping meet strong global demand and eroding the market share of OPEC countries, the International Energy Agency said on Thursday.
"The 2014 outlook... should give oil bulls some cause for alarm," the IEA said.
Olivier Jakob at consultancy Petromatrix in Switzerland said that demand forecasts were a "bit too optimistic", considering a fall in purchasing power by emerging countries.
"We have been highlighting that for the consumers or the budgets in the Emerging Markets the price of oil in local currency is at a record high level and we can see that many countries are currently struggling to find a way to combat the higher dollar," he said in a note.
Brent shed about 22 cents to trade near $108 a barrel after settling at $108.51 on Wednesday, when it touched a three-month top of $108.69.
U.S. crude dipped by more than $1 to hover under $106 a barrel, after peaking at $107.45 earlier, its highest since March 2012. The front-month contract jumped nearly 3 percent in the previous session, its biggest daily rise since early May.
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U.S. data showing higher jobless claims added bearish sentiment to the market, further erasing gains from the previous session.
The earlier oil price spike was on the back a slump in the dollar, after Fed chief Ben Bernanke said the central bank would continue to pursue an accommodative monetary policy given tame inflation and a still fragile labour market.
Crude oil inventories fell to their lowest so far this year, according to U.S. Energy Information Administration published on Wednesday, which had also helped boost U.S. futures.
Brent's premium to U.S. crude narrowed to the smallest since November 2010 at $1.32 after data from the U.S. Energy Information Administration showed the biggest two-week drop on record in crude stockpiles, indicating demand was strong in top oil consumer the United States.
Prompt U.S. crude is now stronger than following months.
"The steep backwardation suggests supply scarcity, but that is hard to reconcile with the reported crude oil stock position," Harry Tchilinguirian, head of commodity market strategy at BNP Paribas in London said.
"Cushing inventories may be at their 'lowest' this year, but they are at their highest in the past 5 years for this period."
According to technical charts, the U.S. benchmark will likely face resistance at $107.24, while Brent's target of $109.51 remains unchanged, Reuters market analyst Wang Tao said.
