Crude oil fell after China took steps to counter inflation

Crude oil fell after China took steps to counter inflation, which could slow economic growth and fuel demand in the largest energy consuming country in the world.

Prices fell 0.7 percent after the Bank of China requires lenders to increase financial reserves by 50 basis points from December 20. Oil rose earlier as China said in November crude oil imports jumped 26 percent and the International Energy Agency raised its forecast for 2011 oil demand for the third month.

"Increasing reserve requirements is probably the first shot in the bow," said Phil Flynn, an analyst with Chicago-based merchant and investment adviser PFGBest. "The market is worried that the Chinese will follow this movement with an increase in interest rates during the weekend."

Crude oil for January delivery fell 58 cents to $ 87.79 a barrel on the New York Mercantile Exchange, the lowest close since Dec. 1. Futures fell 1.6 percent this week and up 24 percent from a year ago.

Brent crude oil for January settlement fell 51 cents, or 0.6 percent, to close the session at $ 90.48 a barrel on London's ICE Futures exchange in Europe.

China said it will release data from the consumer price index tomorrow, two days earlier than expected, fueling speculation of a rise in interest rates. The report may show inflation in November was 5.1 percent, the highest since July 2008, according to the Economic Information Daily, a newspaper affiliated to the government news agency.

meeting Chinese leaders in Beijing this weekend to set economic policy for next year have said they will move to a stricter "prudent" monetary policy.

Chinese Imports

China increased net imports of crude oil by 26 percent in November from the previous month as refiners stepped up processing rates to alleviate the shortage of diesel. Net purchases were 20.3 million tonnes, or 5 million barrels a day, the highest amount since the September record of 22.9 million tonnes, figures from the Beijing-based Customs General Administration showed today.

The International Energy Agency raised its forecast for global oil demand next year, citing increases in consumption in North America and China. Global oil use will average 88.8 million bpd, 260,000 barrels more than its previous forecast, the Paris-based adviser, said today in its monthly report on the oil market.

"The headlines were upside down on worries about economic policy in China as the country tries to control inflation," said Bill O'Grady, chief market strategist Confluence Investment Management in St. Louis.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of world supply, will meet tomorrow in Quito, Ecuador, to review production quotas.

$ 100 oil

Oil prices of $ 100 a barrel can take the group to act, Abdalla El-Badri, the organization's secretary general, said yesterday in Quito. Demand is growing very fast in China and India and moderate members of the Organization for Economic Cooperation and Development said.

"When the price rises to $ 100, that means that there is something wrong with the fundamentals, then we have to do something," said El-Badri told reporters. "If it goes to $ 100 due to speculation, OPEC could not move."

There is no reason for OPEC to change quotas at tomorrow's meeting, the Angolan Oil Minister Jose Maria Botelho de Vasconcelos, said in Quito. The "stable condition" and oil at $ 90 a barrel compensates for the weakness of the dollar, he said.

OPEC raised its forecast for 2011 oil production outside the group on the increases in Russia and China. The non-OPEC supply will rise by 410,000 barrels to 52.62 million barrels a day next year, OPEC said in its monthly report today. That's 50,000 barrels a day more than previously expected.

Price Outlook

Oil may reduce next week in the Chinese moves to curb potential inflation, a survey showed. Eighteen of 39 analysts, or 46 percent, forecast oil will fall through Dec. 17. Thirteen respondents, or 33 percent, predicted that prices will rise and eight estimates that there are few changes.

"Oil likely will move down next week," said John Kilduff, a new partner of Capital LLC, a hedge fund in New York that focuses on energy. "Concern about the degree of fiscal adjustment in response to China's inflation reading this weekend will undermine the confidence about the continued strength of China's energy demand."

volume of oil on the Nymex was 507,899 contracts as of 15:08 in electronic trading in New York. Volume was 742,817 contracts yesterday, down 6 percent above the average of the last three months. Open interest was 1.35 million contracts.