* Unexpected distillate stock increase sends oil below $80
* More Chinese tightening: higher bank reserve requirements
* Winter conditions seen milder this week
(Updates prices, adds details, previous SINGAPORE)
By David Sheppard
LONDON, Jan 13 (Reuters) - Oil fell to its lowest level this year on Wednesday, dipping below $80 a barrel after an industry report showed rising U.S. distillate inventories despite the severe northern hemisphere winter.
The American Petroleum Institute (API) said distillate stocks -- which include heating oil and diesel -- rose by 3.6 million barrels last week, in its weekly report late on Tuesday. Expectations had been for a 1.8 million barrel fall.
Prices were also pressured after China surprised world markets by raising banks' cash reserve requirements, the latest step towards tightening monetary policy, which some traders see potentially dampening rising energy demand.
U.S. crude for February delivery <CLc1> fell as much as $1.16 a barrel to $79.63, the lowest level since the first trading day of 2010, before paring losses to trade down 65 cents at $80.14 a barrel by 0937 GMT.
Prices have fallen by almost $4 since hitting a 15-month high near $84 on Monday.
London Brent crude for February <LCOc1>, which expires on Thursday, fell 63 cents to trade at $78.67 a barrel.
"The market is trading in the $75-$85 range, and if we are getting warmer weather, higher inventories and Chinese monetary policy is changing, then we should now try the lower side of that range," said Keichi Sano, general manager of research at SCM Securities in Tokyo.
China, the world's second largest oil consumer, raised the proportion of deposits that banks must hold in reserve by 0.5 percentage point in a move to keep a lid on inflation.
Concerns that Chinese tightening could moderate the global economic recovery unnerved financial markets, denting stocks, higher-yielding currencies and commodities. [
]"The Chinese economy is an extraordinary buyer of commodities and energy, so people are very concerned about its growth pace," Sano said.
HIGHER INVENTORIES
On top of higher U.S. distillate inventories, crude and gasoline stockpiles in the world's largest energy consumer also rose last week, the API said.
Gasoline inventories soared by 6.8 million barrels, far surpassing expectations for a 1.2 million barrel build. Crude stocks rose by 1.2 million barrels, matching analysts predictions. [
]Stocks of crude and oil products have bulged in the United States over the past 18-months as the economic crisis has cut the demand for energy.
Very cold weather over the last two weeks was expected to have helped to draw down inflated inventories. Warmer weather across the central and eastern United States is expected to arrive in the next few days, DTN Meteorlogic said, reducing heating demand. [
]Government inventory data from the Energy Information Administration (EIA) will be closely watched when it is published at 1530 GMT to see if it confirms the API numbers.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by William Hardy)