By Scott DiSavino

NEW YORK (Reuters) -Oil prices climbed about 2% on Wednesday on a bigger-than-expected weekly drop in U.S. crude stockpiles and as a weaker U.S. dollar overshadowed signs of lower economic growth in China.

Brent futures rose $1.35, or 1.6%, to $85.08 a barrel by 1:33 p.m. EDT (1733 GMT), while U.S. West Texas Intermediate (WTI) crude rose $2.09, or 2.6%, to settle at $82.85.

On Tuesday, Brent closed at its lowest level since June 14 and WTI at its lowest since June 21.

The premium of Brent over WTI narrowed to around $3.65 a barrel, the lowest since October 2023. The narrowing spread means energy firms have less reason to spend money to send ships to the U.S. to pick up crude for export.

In the U.S., the Energy Information Administration said energy firms pulled 4.9 million barrels of crude from storage during the week ended July 12.

That compares with the 30,000-barrel decline analysts forecast in a Reuters poll and a drop of 4.4 million barrels in a report from the American Petroleum Institute trade group.

In U.S. refining news, the diesel and 321- crack spreads, which measure refining profit margins, fell to their lowest levels since December 2021 and January 2024, respectively.

A weaker U.S. dollar also helped support oil prices after the dollar hit a 17-week low against a basket of major currencies.

A weaker dollar can boost demand for oil by making greenback-denominated commodities like oil cheaper for holders of other currencies.

SLOWER GROWTH IN CHINA

China, the world’s top oil importer, saw its economy grow 4.7% in the second quarter, official data showed earlier this week, the slowest growth since the first quarter of 2023, capping crude price gains.

“Recent data have signaled a slowing of growth in the United States, the euro area, and China,” analysts at Citigroup’s Citi Research unit said in a report. “Central banks,” they added, “are getting closer to a point where they will have scope to cut rates in earnest.”

In the U.S., single-family homebuilding fell to an eight-month low in June amid higher mortgage rates, suggesting the housing market was likely a drag on economic growth in the second quarter.

Top U.S. Federal Reserve officials said on Wednesday the central bank is “closer” to cutting interest rates given inflation’s improved trajectory and a labor market in better balance, remarks that set the stage for a first reduction in borrowing costs in September.

The Fed hiked rates aggressively in 2022 and 2023 to tame a surge in inflation. Borrowing costs rose for consumers and businesses, slowing economic growth and reducing demand for oil.

Lower interest rates could boost oil demand.

(Reporting by Scott DiSavino in New York, Arunima Kumar in Bengaluru and Ahmad Ghaddar in London; editing by Louise Heavens, Kirsten Donovan, Leslie Adler and Cynthia Osterman)

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