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UPDATE 2-Brent slips below $109 as severe winter eases

Reuters - February 28th, 2014

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* Global surplus oil capacity inches up in Jan, Feb -EIA

* Iran's oil fleet looks to come in from cold as exports pick up

* Brent targets $107.85-$108.11 range -technicals (Update prices)

By Manash Goswami

SINGAPORE, Feb 28 (Reuters) - Brent crude futures slipped below $109 a barrel on Friday due to expectations that demand growth will slow as severe winter weather eases, although supply worries curbed losses for now.

The combination of a severe winter in the United States and Europe along with worries over Middle East supply disruptions supported prices in the early part of the year, helping the oil market avoid the weakness seen in other risk assets such as base metals.

Crude prices are set to come under pressure as demand for heating fuels eases with the weather improving, and global oil supplies appear to be more plentiful.

Brent crude fell 11 cents to $108.85 a barrel by 0755 GMT, after dropping 56 cents in the previous session. The contract is set to end the week down 1 percent, the biggest drop in four weeks; it has gained more than 2 percent in February.

U.S. oil dropped 31 cents to $102.09, and is set to end the week slightly lower, snapping six straight weeks of gains - the longest weekly winning spree in a year. WTI crude is up nearly 5 percent for the month.

"Oil is not reacting like other risk markets because of the winter and geopolitical tensions in the Middle East," said Jonathan Barratt, chief executive of commodity research firm Barratt's Bulletin in Sydney.

"As the weather improves, some shine on that will come off. China's slowdown will compound it even more.

"oil dropped 31 cents to $102.09, and is set to end the week slightly lower, snapping six straight weeks of gains - the longest weekly winning spree in a year"The markets shouldn't be here."

The U.S. benchmark is set to slip to below $100 a barrel, Barratt said, adding the contract should ideally hold between $85-$90 a barrel, reflecting the current demand outlook.

Brent is at the upper end of its range now, he said, and the lower end of the range is $103, with support seen at $106.70.

Global spare oil production capacity inched higher in January and February as demand eased, the U.S. government said.

The Energy Information Administration (EIA) said spare output capacity, which is the amount of oil that global producers can quickly bring on line without major investments - a key factor in global crude prices - averaged 2.1 million barrels per day in the last two months, or about 100,000 bpd higher than in the previous 60 days.

SUPPLY OUTLOOK

U.S. oil production surged in 2013 to the highest level in 25 years as a boom in shale drilling boosted output, the EIA also said.

Oil production for the year rose by nearly 1 million barrels per day (bpd), its largest-ever annual increase, to hit an output level of 7.46 million bpd, the highest since 1989, the agency said in a monthly report.

"There is a lot of oil around even though we have disruptions from a few exporters," said a trader with a western trading house. "The immediate demand outlook isn't very strong either, so we see oil prices remaining under pressure."

Prices are also under pressure on expectations of rising exports from Iran.

Asian buyers increased purchases of Iranian crude by 22 percent in January from a year ago as the grip of sanctions imposed since 2012 loosened following a landmark agreement in November to curtail Tehran's nuclear programme.

China, India, Japan and South Korea together bought an average of 1.25 million bpd last month, government and industry data showed.

The OPEC member's oil tanker fleet is gearing up for more business, with some vessels taking to the high seas after spending more than a year at home ports, in yet another sign an easing in sanctions is enabling exports to pick up.

Ship tracking sources said that in recent weeks at least three Iranian supertankers had made their first trips to Asia after months at Iranian anchorages where they were storing unsold oil. (Editing by Tom Hogue, Himani Sarkar and Simon Cameron-Moore)

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