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NEW YORK (Reuters) - Oil dropped below $88 a barrel on Wednesday as signs of a U.S. economic slowdown outweighed fears that tight-fisted OPEC policy could spark an energy crunch during the height of the winter heating season.
The Organization of Petroleum Exporting Countries, which controls more than a third of the world oil market, shrugged off calls from consumer nations for more supply by agreeing Wednesday to keep output unchanged.
"Our position is that demand and supply are balanced and there is no need to increase oil to the market," said Iranian Oil Minister Gholamhossein Nozari after the group's policy meeting in Abu Dhabi.
U.S. crude futures initially surged more than $2 after the OPEC decision, but dropped back to settle down 83 cents to $87.49 a barrel amid lingering fears over the health of the U.S. economy -- bringing the price almost 12 percent below the all-time peak $99.29 hit November 21.
"The market is divided between those that see tight supplies and those that are worried about economic weakness that might lead to a demand slowdown," said Mike Fitzpatrick, vice president at MF Global.
Brent crude fell $1.04 to $88.49 a barrel.
A credit crisis has combined with spiking energy and commodity prices to hinder economic growth in the United States, which some energy experts say could eventually lead to a worldwide slowdown in oil demand.
Oil prices have been in a slump since late November, clipping a more than 40 percent rally since August that put crude close to $100 a barrel.
U.S. crude stockpiles fell to the lowest level in more than two years last week, according to government data, as fog disrupted the pace of imports into the Gulf Coast.
But inventories of refined fuels, like gasoline and distillates, rose by more than expected due to an uptick in refining activity.
Tempering oil's losses on Wednesday, Canadian Oil Sands Trust COS_u.TO said a fire at an upgrader in Alberta forced it to slow production of synthetic crude oil to "minimum rates."
Energy experts said some of the geopolitical risk premium in the price of oil may also be fading away after a U.S. intelligence report showed Iran ceased its nuclear weapons program years ago.
Additional reporting by Jane Merriman and Santosh Menon in London and Luke Pachymuthu in Singapore; editing by Matthew Lewis