Oct. 28 (Bloomberg) -- Crude oil fell the most in a month after a government report showed an unexpected increase in U.S. gasoline stockpiles and crude supplies rose to a two-month high.

Gasoline inventories climbed 1.62 million barrels last week, the Energy Department said. A 1 million-barrel decline was forecast, according to a Bloomberg News survey. Crude inventories rose as imports advanced the first time in five weeks. Oil also dropped as the dollar gained against the euro.

“The gasoline number was a big surprise and makes people less optimistic about the economy and demand,” said Sean Brodrick, natural resource analyst with Weiss Research in Jupiter, Florida. “You are also seeing strength in the dollar, further weakening the oil market.”

Crude oil for December delivery fell $2.09, or 2.6 percent, to end the session at $77.46 a barrel at 2:51 p.m. on the New York Mercantile Exchange, the lowest settlement since Oct. 14. It was the biggest one-day drop since Sept. 24. Prices have gained 74 percent from the end of 2008 and reached a one-year high of $82 a barrel on Oct. 21.

Gasoline for November delivery declined 8.41 cents, or 4.1 percent, to $1.9864 a gallon in New York, the lowest settlement since Oct. 16. It was the biggest decline since Sept. 23.

“This is a correction, but it doesn’t mean we won’t move back,” said Edward Morse, head of economic research at LCM Commodities LLC in New York. “There’s nothing fundamental in the move above $75 or the move below $82.”

Consumption Decline

Fuel demand dropped 0.8 percent to an average of 18.5 million barrels a day last week, the report showed. Gasoline consumption fell 1 percent to 8.86 million barrels a day.

“We are really just not seeing demand in the U.S. pick up,” Brian Youngberg, an analyst at Edward Jones in Des Peres, Missouri, said in an interview with Bloomberg Television. “U.S. demand for oil probably peaked in 2007. It will improve, but not to those levels.”

Refineries operated at 81.8 percent of capacity, up 0.7 percentage point from the previous week, the report showed. Refiners produced 8.83 million barrels of gasoline a day, up 4.5 percent from the prior week.

“We continue to see evidence of weak demand and excess supply,” said Antoine Halff, head of energy research at Newedge USA LLC in New York. “The gasoline number reflects both a lack of demand and an increase in refinery output.”

Inventories of crude oil rose 778,000 barrels to 339.9 million last week, the report showed. The gain left supplies 9.1 percent higher than the five-year average for the period. A 1.91 million-barrel increase was forecast, according to the median of 16 estimates by analysts in the Bloomberg News survey.

Imports Gain

Imports of crude oil increased 2.2 percent to 8.89 million barrels a day last week, the report showed. Fuel imports climbed 6.3 percent to 2.54 million barrels a day.

Supplies of distillate fuel, a category that includes heating oil and diesel, declined 2.13 million barrels to 167.8 million. Inventories were 29 percent higher than the five-year average for the week, the department said. Stockpiles in the week ended Oct. 2 were at the highest level since January 1983.

Heating oil for November delivery declined 5.82 cents, or 2.8 percent, to $1.9969 a gallon, the lowest settlement since Oct. 14.

“We will be paying attention to stocks, the dollar and any economic numbers in the days ahead,” said Carl Larry, president of Oil Outlooks & Opinions LLC, a Houston-based energy adviser.

The U.S. currency climbed 0.6 percent to $1.4722 per euro from $1.4804 yesterday. A stronger dollar reduces the appeal of commodities to investors looking for an inflation hedge.

The Standard & Poor’s 500 Index retreated 1.6 percent to 1,046.04 at 3:32 p.m. in New York. The MSCI World Index fell for a seventh straight day, the longest losing streak since February.

Raising Questions

“The stock market appears to have hit a ceiling and that raises questions about whether the oil market has as well,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “If the stock market drops, oil is vulnerable because it’s risen more than is justified by the fundamentals.”

Brent crude oil for December settlement dropped $2.06, or 2.6 percent, to end the session at $75.86 a barrel on the London-based ICE Futures Europe exchange.

Oil volume in electronic trading on the Nymex was 484,520 contracts as of 3:07 p.m. in New York. Volume totaled 517,692 contracts yesterday, 8.5 percent lower than the average over the past three months. Open interest was 1.22 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: October 28, 2009 15:49 EDT