Activity in China's factory sector contracted in January for the first time in six months as new orders declined, confirming that a mild slowdown at the end of 2013 has continued into the new year. In the United States, industry data showed a sharp buildup in crude stocks despite a bitterly cold winter.
Brent, which slipped to as low as $107.90, was down 28 cents at $107.99 a barrel by 0734 GMT. It settled up $1.54 on Wednesday at its highest level since Dec. 31.
US oil eased 14 cents to $96.59, after settling $1.76 higher at $96.73.
"The data is a bit concerning," said Ken Hasegawa, a commodity sales manager at Newedge Japan.
"There was a big increase in US crude oil stocks and now China PMI numbers are worse than expected. That's making the market come off."
Base metals as well as Asian shares retreated after the China data. The preliminary Markit/HSBC Purchasing Managers' Index (PMI) fell to 49.6 in January from 50.5 in December, dropping below the 50 line which separates expansion from contraction.
Brent may drop towards $107.50 a barrel during the day, while the US benchmark may fall towards $96, Hasegawa said.
Oil futures surged after TransCanada Corp began delivering crude through a major new pipeline from Oklahoma to the Gulf Coast, expected to help eliminate a bottleneck that has warped the US oil market for three years.
The pipeline may also narrow the price gap between the US benchmark and Brent. US oil's discount to Brent <CL-LCO1=R> settled at $11.54 on Wednesday, the smallest since Dec. 19.
"Oil markets were the best performing commodity markets overnight," analysts at ANZ said in a report. "Market forecasts of a decline in US distillate fuels as a result of increased demand supported both markets."
But Hasegawa said the gains following the pipeline announcement may have been overdone.
"I was a bit surprised to see the rise overnight," Hasegawa said. "We may see some profit-taking as a result of the gains."
Investors are now awaiting official data on oil stockpiles from the US Energy Information Administration (EIA) to gauge the outlook for demand in the United States.
US crude inventories rose by 4.9 million barrels in the week to Jan. 17, to 355.7 million, compared with analysts' expectations for an increase of 600,000 barrels, as refineries cut output, the American Petroleum Institute (API) said.
Distillate stockpiles, which include diesel and heating oil, fell by 2.3 million barrels, compared with expectations for a 900,000 million-barrel drop, the data showed.
Markets are also watching the progress in talks to end the crisis in Syria. Syria's government and opposition, meeting for the first time, vented their mutual hostility on Wednesday but a UN mediator said the enemies may be ready to discuss prisoner swaps, local ceasefires and humanitarian aid.