* EIA: U.S. fuel stocks rise, crude supplies fall
* U.S. tax cut extension plan edges forward
* China interest rates, OPEC meeting in focus
* Coming Up: U.S. jobless claims data on Thursday
(Recasts, updates prices, market activity to settlement)
By Gene Ramos
NEW YORK, Dec 8 (Reuters) - Oil prices dipped for a second
day on Wednesday, as unexpectedly large increases in U.S. fuel
inventories and a stronger dollar sparked selling in crude, one
day after it hit a 26-month high.
A tax cut extension deal between U.S. President Barack
Obama and Republicans that could bolster consumer spending and
boost energy demand helped limit the crude's losses, as did
wintry weather in much of the United States.
U.S. crude for January delivery <CLF1> settled 41 cents
lower at $88.28 a barrel, well off Tuesday's session high of
$90.76, the highest since October, 2008.
Trading was brisk, with volume hitting 676,200 lots as of
3:05 p.m. EST (2005 GMT), surpassing the 30-day average of
652,133.
Prices have fallen from the two-year high, which exceeded
the $90 mark that Saudi Arabian Oil Minister Ali al-Naimi said
on Nov. 1 was a level consumers could tolerate.
Naimi and other oil ministers of the Organization of
Petroleum Exporting Countries, source of more than a third of
the world's oil, meet on Dec. 11 in Quito, Ecuador. The group
is not expected to change its production policy.
[]
In London, ICE January Brent <LCOF1> dropped 62 cents to
settle at $90.77 a barrel.
U.S. gasoline stockpiles rose by a more-than-expected 3.8
million barrels last week, the Energy Information
Administration's inventory data showed. []
Stocks of distillates, which include heating oil and diesel
fuel, rose 2.2 million barrels, dashing forecasts for a modest
drawdown.
The fuel stocks increase overshadowed a drawdown of 3.8
million barrels in crude inventories, larger than expected, on
the heels of a surprisingly big jump in refinery utilization.
"On the surface this is a bearish report showing lackluster
demand with the increase in products," said Mike Zarembski of
OptionsXpress in Chicago.
TAX CUT DEAL, DOLLAR MOVEMENT
Obama's plan to broadly extend tax cuts edged forward
despite opposition from his own Democrats and fear in the bond
markets of long-term damage to the economy. []
Some see the plan as a needed stimulus to the shaky
economy, but others fear the longer-term rise in U.S. debt.
The dollar trimmed gains against the yen and the euro as
U.S. Treasury yields came off their highs following a $21
billion sale of 10-year notes. The dollar rose earlier as
Treasury yields spiked in reaction to the likelihood of the tax
cut plan going forward. []
The dollar rose 0.2 percent against a basket of currencies
<.DXY>, as money traders put euro zone debt concerns on the
back burner, focusing instead on U.S. economic prospects.
Recent U.S. economic data on retail sales and growth in the
service sector signaled economic recovery, although last week's
data showing a jump to 9.8 percent in the unemployment rate has
tempered the growth outlook.
A stronger dollar tends to weigh on the price of oil and
other dollar-denominated commodities.
Analysts noted that from Tuesday, the oil price structure
has normalized further after a dramatic switch on Friday and
Monday to backwardation, in which crude deliveries in the near
future have higher prices than those later on.
When prices are higher for the later months, the situation
is called contango.
"The rapid reversal of structural contango positions has
now given way to a more measured response to tighter market
conditions," said Lawrence Eagles, analyst at J.P. Morgan in
New York.
Oil's downward trend could persist if China proceeded with
a speculated rise in interest rates to cool down its overheated
economic growth.
"For the holiday period the main risk will come from China
as the odds for an interest rate hike are increasing," said
Olivier Jakob from Petromatrix.
(Additional reporting by Robert Gibbons in New York, Dmitry
Zhdannikov and Alex Lawler in London; Alejandro Barbajosa in
Singapore; Editing by David Gregorio)
