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Oil holds near three-month high on signs of tightening supply

(Reuters) -Oil prices slipped on Tuesday but were still near a three-month high reached in the previous session on signs of tightening global supply, as producers implement output cuts, and strong demand in the United States, the world's biggest fuel consumer.

Brent crude futures for October were at $85.24 a barrel at 0710 GMT, down 19 cents or 0.2% lower from its close. Front-month Brent settled at its highest since April 13 on Monday.

U.S. West Texas Intermediate crude futures were at $81.60 a barrel, down 0.2% or 20 cents from the previous session's settlement, which was its highest since April 14.

"Oil prices may face a correction risk as the markets may have been overbought in the past month. However, a softened U.S. dollar and China's policy optimism may continue to provide bullish factors to crude futures," said Tina Teng, an analyst at CMC Markets, as a weaker greenback makes dollar-priced oil cheaper for holders of other currencies.

"Signs of a soft-landing U.S. economy have also improved oil's demand outlook," Teng added.

Chinese authorities released additional policy guidelines on Monday - though without concrete measures - to boost its economy and domestic consumption, after manufacturing activity fell for a fourth month in July.

A private sector survey also showed on Tuesday that China's factory activity swung to contraction in July, with supply, demand and export orders all deteriorating amid sluggish market conditions.

Attention is turning to this Friday's ministerial monitoring committee meeting of the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, which analysts expect to provide some colour on the market outlook.

In June, OPEC+ agreed on a broad deal to limit oil supply into 2024, and Saudi Arabia pledged an additional voluntary cut of 1 million barrels per day for July. On July 3, Saudi Arabia said the cut would include August, adding that it could be extended further.

National Australia Bank (OTC:NABZY) analysts said they expect Saudi Arabia to extend its voluntary 1 million barrels per day (bpd) supply cut into September.

"Oil prices are on track to hit 2023 price highs in our view," NAB analysts said in a note.

The Saudi Arabian cuts fell slightly short of the target, with output down by 860,000 bpd in July, while total production from OPEC was 840,000 bpd lower, a Reuters survey showed on Monday.

The data showing the supply cuts coincided with U.S. figures released on Monday showing fuel demand rose to 20.78 million bpd in May, the highest since August 2019. The data from the Energy Information Administration also showed gasoline demand, expressed as product supplied to the market, surged to 9.11 million bpd, the highest since June 2022.

U.S. crude oil and gasoline stockpiles were expected to have declined last week, according to a Reuters poll which estimated on average that crude inventories fell by about 900,000 barrels in the week to July 28.

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