Oil slides 1 pct on global rout; Iran limits loss

SINGAPORE, Feb 28 (Reuters) Oil fell more than 1 percent on Wednesday, catching up with a global market rout triggered by a sharp sell-off in China's main equity exchange, but confidence in the economy and fears over Iran limited the slide.

U.S. crude trimmed deeper losses to stand 71 cents lower at .75 a barrel by 0451 GMT, tumbling sharply from the previous day's two-month high to touch a .92 low as the shockwave from Shanghai sent ripples through markets worldwide.

London Brent crude fell 56 cents to .80 a barrel.

Oil posted a small gain on Tuesday, shrugging off the steepest fall in Shanghai shares in a decade and a global flight from risk as traders focused on U.S. refinery glitches, summer fuel supply worries and mounting worries over Iran.

But prices plunged after the close of floor trade, as some investors cashed out of energy positions to cover margin calls in other markets that had fallen more sharply, while others feared a spillover effect that could erode oil demand in China.

For many analysts, however, oil's decline appeared to be an overreaction, as few question the economic health of the world's second-biggest oil consumer.

''The Chinese economy is very strong. This is a fairly cross-market, sentiment-driven reaction, not a fundamentally driven one,'' said Andrew Harrington, commodities analyst at Australia and New Zealand bank in Australia.

''Product inventories and Iran are both keeping prices supported,'' Harrington said.

China's main Shanghai Composite index lost nearly 9 percent on Tuesday amid fears that authorities would crack down on speculation that had driven shares to record highs and fuelled a 130 percent gain in the market last year.

This triggered a more than 3 percent fall in the U.S. Standard and Poor's 500 index, its biggest one-day slide in more than 3-{ years, and Asian stocks carried on falling as investors shed riskier assets to move money into bonds or cash. Shares in Shanghai stablised after Tuesday's losses, however.

''It's a chain reaction to stocks, not a reaction to fundamentals,'' said Keith Sano, manager at the commodities business department of Sumitomo Corp. in Tokyo.

''It's a mini panic now but there might be a risk of a real panic starting. We have to be cautious of the risk.'' A sharper than expected 7.8 percent drop in U.S. orders for durable goods last month, reported on Tuesday, showed wariness over the economy, further fuelling selling.

But for oil markets, Iran and the tightening of U.S. fuel supplies helped prevent the deeper losses suffered elsewhere.

Iran, embroiled in a more than year-long standoff with the West over its nuclear programme, stood defiant on Tuesday, saying it would never suspend uranium enrichment even as world powers worked on a new U.N. resolution to ratchet up the pressure.

U.S. distillate inventories probably declined last week for the fifth consecutive time by about 2.8 million barrels, more sharply than usual, a Reuters survey showed on Tuesday.

Gasoline supplies were projected to have fallen by an average 1.8 million barrels, with crude inventories expected up 1.9 million barrels. The government data are due out at 1530 GMT.

REUTERS CS ND1206