Tuesday September 1, 09:20 AM

Oil holds $70 after 4 pct drop, awaits U.S. data

By Jennifer Tan

SINGAPORE (Reuters) - Oil was little changed at $70 a barrel on Tuesday, after a 4 percent fall overnight, as Chinese stocks recovered their poise following manufacturing sector data that suggested China's economic recovery was on track.

The release of a key gauge of U.S. manufacturing activity in August and weekly crude inventory data later in the day, both of which are expected to show a gradual rebound in the U.S. economy and oil consumption, will set the trading tone for the market.

By 0220 GMT, U.S. crude for October delivery rose 7 cents to $70.03 a barrel, after falling 3.8 percent on Monday. London Brent crude rose 4 cents to $69.69 a barrel.

China's benchmark Shanghai stocks index, an increasingly important gauge of global market sentiment, traded either side of parity on Tuesday after diving 6.74 percent a three-month low on Monday, spooking global risk markets on worries that the Chinese government was tightening bank lending to moderate growth and curb speculation.

Underpinning sentiment, HSBC's China Purchasing Managers' Index (PMI) on Tuesday showed a rise in August to a 16-month high of 55.1, from 52.8 in July, as a jump in both output and new orders underscored signs of a recovery.

In the United States, the Institute for Supply Management's manufacturing gauge -- due at 1400 GMT -- is expected to have risen to 50.5 in August from 48.9 in July, which would bring it into positive territory for the first time since the recession began, a Reuters poll of economists showed.

"The U.S. ISM data is quite important and will set the tone. If the data comes out worse than expected, we could see the market fall further towards $65," Ben Westmore, commodities analyst with the National Australia Bank.

Weekly oil inventory data from the American Petroleum Institute (API), due at 2030 GMT, will also provide trading cues.

U.S. crude stocks likely fell 400,000 barrels last week, helped by a slight rise in refinery utilisation, a preliminary Reuters poll of analysts showed.

The U.S. Energy Information Administration (EIA) will release its own data on Wednesday.

On the supply front, the Organization of the Petroleum Exporting Countries is likely to leave output targets unchanged when will meet to consider oil output policy on Sept. 9 in Vienna, several ministers and officials have said.

Even though OPEC agreed to 4.2 million barrels per day of supply curbs late last year, and has kept output targets steady so far in 2009, actual production has been rising in recent months, according to industry surveys.