Oil drops on shrinking Chinese factory activity; US data in focus

Investors were also exercising caution as they awaited the U.S. personal consumption expenditure report later in the day for insights into the interest rate outlook.

Brent crude futures for October, set to expire on Thursday, fell by 9 cents (0.1%) to $85.77 per barrel as of 0630 GMT. The more active November contract saw a 10-cent (0.1%) decline to $85.14.

U.S. West Texas Intermediate crude futures for October experienced a 6-cent (0.1%) drop, landing at $81.57.

China's official factory survey for August revealed that manufacturing activity had declined once again. The official purchasing managers' index (PMI) increased to 49.7 from 49.3 in July, according to the National Bureau of Statistics, but remained below the critical 50-point threshold that distinguishes contraction from expansion. This raised concerns about the health of the world's second-largest economy.

Yeap Jun Rong, a market strategist at IG, pointed out that a tighter U.S. oil supply outlook had supported prices in the previous session. However, these gains were counterbalanced by concerns regarding demand. "Overall, these conflicting factors are causing price indecision today, further exacerbated by a wait-and-see approach as attention shifts to the U.S. core PCE release later tonight," noted Yeap.

Investors are closely monitoring inflation figures as measured by the U.S. personal consumption expenditures, which are scheduled for release on Thursday. The PCE is the Federal Reserve's preferred gauge for tracking inflation.