Oil drops on slowing Chinese demand, U.S.-China trade spat

By Stephanie Kelly

NEW YORK (Reuters) - Oil prices fell on Wednesday as a trade dispute between the United States and China escalated further and after Chinese import data showed a slowdown in demand.

Brent crude futures fell $1.88 to $72.77 a barrel, a 2.5 percent loss, by 10:56 a.m. EDT (1456 GMT).

U.S. West Texas Intermediate (WTI) crude futures fell $1.85 to $67.32 a barrel, a 2.7 percent loss.

China is slapping additional tariffs of 25 percent on $16 billion worth of U.S. imports, from fuel and steel products to autos and medical equipment, as the world's largest economies escalated their trade dispute.

The trade spat has rattled global markets on fears it could lead to a slowdown of the world's largest economies and result in lower demand for commodities.

China's crude imports recovered slightly in July after falling for the previous two months, but were still among the lowest this year due to a dropoff in demand from the country's smaller independent, or "teapot," refineries.

Shipments into the world's biggest importer of crude came in at 36.02 million tonnes last month, or 8.48 million barrels per day, rising from 8.18 million bpd a year earlier and just up on June's 8.36 million bpd, customs data showed.

"Even before their implementation, these proposed (Chinese) tariffs are starting to have an impact, with Chinese imports of U.S. crude falling by 70 percent from April to July," Goldman Sachs said in a note on Wednesday.

The bank said, however, that such tariffs were unlikely to derail the outlook for U.S. energy exports.

Also weighing on prices on Wednesday was data from the U.S. Energy Information Administration that market participants described as bearish. Crude inventories fell by 1.4 million barrels in the last week, the EIA data showed, compared with analysts' expectations for a decrease of 3.3 million barrels.

Gasoline stocks rose by 2.9 million barrels, compared with analysts' expectations in a Reuters poll for a 1.7 million barrel drop.

"Gasoline demand has been one of the main bullish stories in the oil market and if that demand is slipping off a little bit, maybe we're seeing reluctance to higher prices," said Phil Flynn, an analyst at Price Futures Group in Chicago.

Markets remained supported by the introduction on Tuesday of new U.S. sanctions against Iran, which initially target Iran's purchases of U.S. dollars - in which oil is traded - as well as metals trading, coal, industrial software and its auto sector.

From November, Washington will also target Iran's petroleum sector.

Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries.

However, a U.S. plan to reduce Iran's oil exports to zero will not succeed, Iranian Foreign Minister Mohammad Javad Zarif was cited as saying by an Iranian newspaper on Wednesday.

(Reporting by Stephanie Kelly in New York, Henning Gloystein in Singapore, and Dmitry Zhdannikov and Amanda Cooper in London; Editing by Jane Merriman and Bernadette Baum)