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Oil slips as China demand slows; pares loss on Fed

NEW YORK (Reuters) - Oil futures prices fell on Tuesday, but pared losses in late trade after the Federal Reserve said it would keep interest rates low and take other steps to cut borrowing costs and encourage economic recovery.

Motorists are shown at gas pumps at a Chevron gasoline station in Burbank, California July 31, 2009. REUTERS/Fred Prouser

Earlier, oil had been slipped after data showed China’s crude oil imports slowed in July and as the dollar rose.

But the dollar fell against the yen and erased gains against the euro after the Federal Reserve unveiled plans to boost a flagging economy by reinvesting money from maturing mortgage bonds into government debt.

This marked a policy shift for the Fed, which just months ago had been debating how to start winding down its various monetary stimulus programs.

The prospect of continued cheap money helped U.S. stocks, which ended down on the day but well above session lows. .N

U.S. crude for September delivery fell $1.23, or 1.51 percent, to settle at $80.25 a barrel, trading from $79.20 to $81.62.

Front-month ICE Brent crude fell $1.39 to settle at $79.60 a barrel.

“The oil markets appear to have found some support on the Fed announcement that it will continue to keep interest rates exceptionally low for an extended period,” said Gene McGillian, analyst, Tradition Energy, Stamford, Connecticut.

“Low interest rates attract money to commodities. The dollar paring its gains allowed crude futures to pare losses,”

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CHINESE CRUDE OIL IMPORTS SLOW

Along with the dollar’s strength, oil futures and equities markets were pressured early by news of reduced Chinese crude oil imports in July.

China imported 19 million tonnes, or 4.47 million barrels, of crude per day in July, down 17.5 percent from June’s record 5.4 million bpd, official data showed.

In the same month, overall imports rose 22.7 percent, well short of forecasts, helping to drive down Chinese share prices .SSEC by 2.9 percent.

Demand from China has been a key supportive factor for oil prices as consumption in developed markets has stalled.

In another signal of weak demand, U.S. weekly retail gasoline demand fell 1.6 percent in the week ending August 6 from the previous week, according to a report from MasterCard Advisors. Year-on-year, demand was up a tepid 0.5 percent.

A more supportive outlook came from the U.S. Energy Information Administration in a monthly report that modestly boosted global oil demand growth expectations for 2010 and 2011, with developing countries driving consumption despite a slower outlook for the U.S. economy.

OIL INVENTORY REPORTS

After the Fed decision, oil traders focused on the week’s oil inventory reports, starting with the American Petroleum Institute’s report released on Tuesday after oil prices had settled.

The API said crude stocks fell 2.2 million barrels in the week to August 6, more than analysts had expected. <API/S>

Gasoline stocks fell 1.5 million barrels and distillate stocks, which include diesel fuel and heating oil, rose 2.3 million barrels, the API said.

Ahead of the API report, a Reuters survey of analysts on Tuesday yielded a forecast for crude oil stocks to have fallen 1.9 million barrels last week.

Gasoline stockpiles were expected to be up slightly, by 200,000 barrels, with distillate stocks expected to be up 1.4 million barrels.

The more closely watched inventory report from the EIA is set to be released at 10:30 a.m. (1430 GMT) on Wednesday.

Additional reporting by Gene Ramos in New York, Barbara Lewis in London and Florence Tan in Singapore; Editing by David Gregorio

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