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Fri 22 Jan 2010 04:44 PM

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Oil steadies after drop on Obama plan

Obama's proposals to cut proprietary trading at large banks tempers gains.

Oil steadied around $76 on Friday as commodities across the board held their ground after dropping on U.S. president Barack Obama's proposed reforms of banks' trading.

Crude recoverd from a one-month low as a weaker dollar and an unexpected drop in U.S. crude stocks lent support.

U.S. crude was 2 cents up at $76.10 a barrel at 1130 GMT, after earlier touching the lowest level since Dec. 23 of $75.62 a barrel. ICE Brent crude rose 12 cents to $74.70.

Obama's proposals to cut proprietary trading at large banks tempered gains on concerns about a possible retrenchment of banks and funds in the commodity sector.

"The initiative did unnerve many players in the commodity space, as the move may imply less trading by funds who are associated, promoted, or financed by banks," said oil analyst Edward Meir of MF Global.

Oil prices rose to 15-month highs near $84 a barrel in early January, partly due to an influx of money following a hike in fund allocations.

"Potentially, some funds will need to revise their exposure for the second half of the year," said Petromatrix analyst Olivier Jakob, referring to both Obama's plan and the package of proposals unveiled last week by the U.S. futures regulator, the Commodity Futures Trading Commission.

"For now, it will weigh on sentiment in a global sense," said Jakob.

A fall in inventory levels in the world's biggest oil consumer, shown in data released on Thursday, supported prices

U.S. crude stocks fell by by 400,000 barrels last week and distillates, including heating oil, also fell by a more than expected amount according to the Energy Information Administration, raising hopes about the pace of demand recovery in the world's largest energy consumer.

The dollar fell broadly against other currencies and this also helped boost oil prices. A weak dollar tends to support oil as it makes it cheaper for non-dollar buyers.

Analysts said that $75 a barrel was likely to remain a key support level, defining the bottom of the current $75-$80 trading range.

"In the rally, speculators added length. $75 a barrel needs to hold and if it doesn't, there could be further liquidation of positions and further falls," said Jakob.

Concerns that oil-consuming nations could take steps to temper growth may also weigh on prices going forward, analysts said. The world's number two oil consumer China reported fourth quarter growth of 10.7 percent on Thursday, its first double digit figure since 2008.

"Any efforts by the Chinese government to slow the economy would affect demand for raw materials," said Serene Lim, a Singapore-based oil analyst at ANZ. (Reuters)

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