Oil extended losses toward $78 a barrel on Wednesday on tighter credit policy in China, a stronger dollar and expectations that U.S. refiners processed less crude.

Chinese banking authorities have instructed some major banks to stop new lending for the rest of January after loan growth surged in the first few weeks of the year, official media and banking sources said on Wednesday.

I expect China to continue to tighten its monetary policy over the next six months, said Clarence Chu, an energy trader at Hudson Capital Energy in Singapore.

People expect less cash to be flowing around, so today's news would also have a bearish impact on the market in the short run.

Separately, U.S. crude inventories likely rose for a third straight week last week as imports increased and refinery utilization fell with the start of the maintenance season, a preliminary Reuters poll of analysts showed.

U.S. crude for February delivery fell as much as 65 cents to $78.37 a barrel and was trading down 63 cents at 12 a.m. EST on its last day as the front-month NYMEX contract. March crude declined 60 cents to $78.72. London Brent for March fell 59 cents to $77.04.

A stronger dollar also weighed on crude prices. The euro fell to its lowest level in five months against sterling and its weakest level in four months against the dollar on Wednesday after triggering stop losses.

The inverse relation between the dollar and crude has been pretty strong during Asian trading hours, Chu said.

On Tuesday, prices hit their lowest this year at $76.76 for front-month U.S. crude futures before rising to above $79. They had touched a 15-month high near $84 on January 11.

RISING STOCKPILES

U.S. inventory reports this week are due out a day later than usual because of Monday's Martin Luther King Jr. holiday. The American Petroleum Institute will issue its industry report later on Wednesday at 4:30 p.m. EST. The Energy Information Administration will publish government data on Thursday at 11 a.m. EST.

U.S. crude stockpiles were expected to have gained 2.5 million barrels on average the week ended January 15, a survey of eight analysts showed.

Distillate stocks were projected up 400,000 barrels, with heating oil demand expected to have fallen amid moderating winter temperatures in the U.S. Northeast. Gasoline stocks probably rose 1.9 million barrels.

The country's refinery utilization was forecast to have fallen 0.3 percentage point to 81.0 percent of capacity.

If refinery runs go up, it means that they are turning that crude into products, but that is not happening, said Hudson Capital's Chu. Refinery runs are actually down, so they are storing the crude somewhere.

Some U.S. refineries have begun their first-quarter maintenance, with the goal of retooling for gasoline production ahead of the summer driving season.

MONETARY POLICY

China's move to limit credit could be interpreted as further tightening of Chinese monetary policy. Higher reserve requirements for Chinese banks last week pulled commodity prices lower as traders anticipated the phasing out of economic stimulus measures.

Still, Chinese industrial production probably grew at its fastest pace in almost four years, jumping by 20 percent in the year to December compared to a reading of 19.2 percent in November. China's December economic indicators will be published on Wednesday at 9 p.m. EST.

(Editing by Ed Lane)

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