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US oil ends near $105, gripped by fears of faltering China

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Oil prices dropped on Friday, amid concerns over falling Chinese demand after the world's second-largest oil consumer ordered factories to reduce output over worries of excess capacity.

U.S. crude traded as low as $104.10, but by the session ended down 79 cents at $104.70. Brent crude fell 50 cents to $107, after touching a three-and-a-half-month high last week near $110.

Brent futures for September last traded down 70 cents near $107 per barrel. U.S. light crude for September was down nearly $1 under $105 a barrel.

Earlier in the day, Chinese stocks markets dropped after China's industry ministry ordered companies across 19 industries to close outdated capacity by the end of September. The news from China overshadowed a report showing U.S. consumer sentiment is at a six-year high.

"We have a shift in sentiment towards demand concerns following Chinese economic data this week," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

"Oil ought to be benefiting from the weaker dollar and strengthening U.S. economy, but that is not the theme today."

(Read more: Relax! Oil will sell off soon: Pro)

The North Sea benchmark's premium to West Texas Intermediate held at $2.58.

Gasoline futures held steady gaining less than a cent to trade at $3.01 a gallon.

The dollar hovered near a more than one-month low against a basket of major currencies, encouraging investors to buy dollar-denominated commodities such as oil.

China's manufacturing activity hit an 11-month low in July and its job market weakened, according to preliminary data from HSBC, raising concerns of slower demand growth in the world's second-largest oil consumer.

"The market is focused on demand rather than supply," ANZ analyst Natalie Rampono said.

U.S. crude output hit its highest since 1990, while crude inventories showed a much smaller fall in the week to July 19 than in previous weeks, data from the U.S. Energy Information Administration showed.

Supportive supply cuts

Supply disruptions in the North Sea, Middle East and Africa, however, offered some support to oil prices.

The North Sea's Forties pipeline has cut pumping rates by about 40,000 barrels per day (bpd) because of maintenance work, tightening supply of the crude that underpins the Brent benchmark.

In Iraq, crude exports will be cut by between 400,000 and 500,000 bpd in September due to maintenance at ports, while Yemen's key export pipeline has been blown up by tribesmen.

Protests in Libya have also halted oil exports from a key port, and South Sudan is set to stop crude output by Aug. 7 in a dispute with Sudan.

Traders are eyeing protests in Egypt on Friday for any signs that conflict will spill over into other countries in the Middle East that could threaten oil supply.

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