Oil fell by more than $1 to move toward $76 a barrel for the first time this year, as strength in the dollar and weak demand saw crude extend recent losses.

The U.S. Department of Energy reported crude oil inventories dipped by 400,000 barrels to 330.6 million barrels in its weekly snapshot of fuel stocks in the world's largest energy consumer.

While expectations in the market had been for crude stocks to rise, many analysts and traders said the headline figure was a steep drop in refinery utilization.

You really have to focus on the refinery rates dropping sharply -- it seems that refineries are loath to produce product, OptionsExpress analyst Mike Zarembski said.

Until we get refinery rates up it looks like crude oil demand is just lackluster. The whole trend in commodities is down and that is the way traders are looking at this report right now.

Weak demand during the still fragile economic recovery has seen refiners rapidly scale back activity to try and underpin profit margins. Refinery activity is now at just 78.4 percent of capacity, having fallen by almost 3 percent last week.

U.S. crude oil for March delivery, the new front-month contract, fell 96 cents to $76.78 a barrel by 1429 GMT, having earlier hit a low of $76.33.

London Brent crude fell 6 cents to $76.26.

Prices took some support from a drop in U.S. distillate stocks, which include diesel and heating oil. The DoE said they declined by 3.3 million barrels last week to 157.1 million barrels.

Gasoline stocks rose by 3.9 million barrels to 227.4 million barrels.

DOLLAR DENTS COMMODITIES

The dollar's jump to a five-month high against the euro also pressured commodities on Thursday. Commodities priced in the greenback tend to fall as the dollar rises as they become more expensive for holders of other currencies.

Prices were also weighed down by concerns China will take further measures to temper its booming economy after it posted double-digit growth in the fourth quarter for the first time since 2008.

China's annual gross domestic product growth accelerated in the fourth quarter to 10.7 percent -- the fastest in two years -- from a revised 9.1 percent in the third, the National Bureau of Statistics (NBS) said on Thursday.

For all of 2009, China grew 8.7 percent.

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Investors will soon have to assess whether this report -- and others like it -- will be strong enough to allow the commodity rally to continue without alarming the authorities even further, MF Global analyst Edward Meir said.

World growth could falter as governments pull back some of the extraordinary liquidity they pumped into markets, the World Bank said on Wednesday.

The Chinese government has signaled it will tighten credit in 2010, calling on banks to increase reserves and curb lending.

U.S. crude reached a 15-month high of $83.95 a barrel on January 11. Prices are 47 percent below their July 2008 record high near $150, but have more than doubled from lows near $32 reached by the end of that year.

(Additional reporting by Alejandro Barbajosa in Singapore; Editing by Keiron Henderson)

China Crude oil