Oil drops on demand and inventory concerns

NEW YORK (Reuters) - Brent oil fell more than 1 percent on Tuesday in volatile trading as disappointing U.S. retail sales growth and China's battle against rising inflation boosted worries about demand from the world's two largest energy consumers.

U.S. crude prices pulled back ahead of weekly oil inventory reports expected to show U.S. crude oil stocks rose last week.

While protests in Iran and other Middle East countries remained a concern, analysts looked for some unwinding of the geopolitical fear premium put in during Egypt's protests.

"There may be some unwinding of the fear premium on overall risk reduction as the Middle East hasn't gotten out of control yet and traders also are getting ready for another expected rise in U.S. oil supplies," said Phil Flynn, analyst at PFGBest Research in Chicago.

Brent's more pronounced retreat had some traders and analysts expecting the wide gap between the two benchmarks to come under pressure.

Brent crude for April delivery fell $1.44 to settle at $101.64 a barrel. Prices hit a 28-month peak at $104.30 on Monday.

U.S. crude for March delivery fell 49 cents to settle at $84.32 a barrel.

Brent's premium to U.S. crude seesawed between $13.24 and $14.90 on Tuesday. Brent's premium to U.S. crude surged to a record above $16 a barrel on Friday, still measuring the two March contracts before the March Brent's expiration.

"That Brent/WTI spread may be getting a little heavy," said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.

U.S. crude has been dogged by high crude oil inventories, especially at the landlocked Cushing, Oklahoma, contract delivery point for the benchmark West Texas Intermediate.

U.S. crude stocks fell 354,000 barrels in the week to February 11, against expectations supplies would be up, according to the industry group the American Petroleum Institute's weekly report released late on Tuesday.

But Cushing stockpiles rose 250,000 barrels, the API said.

Distillate stocks fell 1.2 million barrels and gasoline stocks rose 1.2 million barrels, according to the API.

U.S. crude prices held losses in post-settlement trading after the release of the report.

Analysts surveyed by Reuters ahead of the API report expected U.S. crude inventories to be up 2.2 million barrels last week.

Distillate stocks were forecast down 800,000 barrels while gasoline stocks were expected to be up 1.7 million barrels.

The U.S. Energy Information Administration's report is set for release at 10:30 a.m. EST on Wednesday.

CHINESE INFLATION

China's consumer price inflation came in lower than expected for January at 4.9 percent.

But core inflation, stripped of volatile food prices, jumped to 2.6 percent year on year, the highest since at least 2002 and up from 2.1 percent a month earlier.

Concern that China may continue monetary tightening and curb demand growth pulled copper prices off record highs.

MIXED U.S. ECONOMIC DATA

U.S. stocks slid as energy shares pulled back, and after initially slipping on the smaller-than-expected rise in retail sales that fueled doubts about consumer spending. .N

U.S. retail sales growth slowed in January, but at least some oil traders and analysts saw the data as supportive or neutral considering the extreme weather that curbed shopping traffic.

U.S. retail gasoline demand fell for a second consecutive week, affected by rising retail prices, a report from MasterCard showed. Demand was up and gasoline prices were up 19.5 percent from the year-ago period.

Early on Tuesday, some brokers and analysts pointed to supportive data such as the New York Federal Reserve's gauge of manufacturing in New York State which climbed in February to its best mark since June.

(Additional reporting by Claire Milhench in London, Jennifer Tan in Singapore and Gene Ramos in New York; Editing by Lisa Shumaker)