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UPDATE 8-U.S. crude falls on China slowdown, equities market tumble

Elizabeth Dilts
Friday, 24 Jan 2014 | 3:49 PM ET

* Brent rises, blows spread out to $11

* Heating fuel rises more than 2 percent

* U.S. equities market down 1 percent, weighs on oil

* Expectations of more U.S. Fed tapering hit oil

(Updates settlement prices, adds analyst quotes)

NEW YORK, Jan 24 (Reuters) - U.S. crude settled lower on Friday on reports of a slowing economy in China and a downward slide in U.S. equities, while Brent saw slight gains on spread trading.

China's economic growth is expected to slow gradually over the next two years as the government forges ahead with structural reforms and seeks to curb elevated debt levels, a Reuters poll showed.

China's economic woes and political problems in Turkey, Argentina and Ukraine drove U.S. stock markets down, with the S&P 500 on track to post its worst drop in more over two months.

Also weighing on oil prices were expectations that the U.S. Federal Reserve will further trim its market-friendly stimulus measures when it concludes a two-day meeting on Wednesday.

Oil products rose sharply on bitter cold in the United States that sapped stockpiles of crude and distillates there and drew heating oil imports from Europe, Russia and Asia.

"The over-arching issue is the emerging market turmoil," said Bill O'Grady, executive vice president and chief market strategist for Confluence Investment Management in St. Louis, Missouri. "Contagion is a pretty significant risk."

Brent crude rebounded from a drop of more than $1.20 to settle 30 cents higher at $107.88,its biggest weekly gain since Dec. 20.

WTI gave back some of its gains from Thursday to settle down 68 cents at $96.64. It settled 59 cents higher on Thursday.

Brent's premium to U.S. oil narrowed to its tightest in more than two months early in the session, but eased back out by 76 cents to settle at $11.24 on spread trading.

"The tightening of the spread is going to get sold again," said Paul Smith, chief risk officer at Mobius Risk Group in Houston. "The market will start risk-adjusting the spread because we'll get a bunch of supplies on the market as we head into the refinery maintenance season."

Ultra Low Sulfur Diesel rose for the eighth day to reach its highest settlement price this year, up 6.09 cents to end the day at $3.1374. Analysts attribute the spike to sustained cold weather.

"The northern hemisphere weather is supportive of crude and products," said O'Grady.

Data from Thursday that showed China's factory sector shrank in January for the first time in six months continued to weigh on oil prices, suggesting a weak start for the economy in 2014.

With many market participants expecting the Fed to shave its stimulus by another $10 billion a month next week, investors will look to less risky assets such as U.S. bonds, expecting interest rates will begin to rise.

In a bearish move for oil markets, it appears Iran may be coming closer to exporting more oil. President Hassan Rouhani promised energy executives Thursday at the World Economic Forum in Davos that the nation would develop an attractive investment model for oil contracts by September as part of a drive to lure back Western business.

But a monthly report from industry group American Petroleum Institute showed a rise in U.S. demand for petroleum products, reflecting a continued improvement in domestic manufacturing and the broader economy.

Demand in December rose 5.8 percent year-on-year to 19.2 million barrels per day, the API said.

(Additional reporting by Lin Noueihed in London and Manash Goswami in Singapore; Editing by Lisa Von Ahn, Bernadette Baum and Andrew Hay)