Oct. 29 (Bloomberg) -- Oil rose before a report forecast to show the U.S. economy expanded in the third quarter for the first time in more than a year, while a weaker dollar drew investors seeking a currency hedge.

The world’s largest economy expanded at a 3.2 percent annual pace from July through September after shrinking in the previous four quarters, according to a Bloomberg survey. Oil fell the most in a month yesterday after the Energy Department said that U.S. gasoline stockpiles climbed by 1.62 million barrels, more than expected.

“We are still moving in line with stock market sentiment and against swinging dollar rates,” said Andrey Kryuchenkov, an analyst with VTB Capital in London. “The market is looking favorable in the long-term. Improving fundamentals could see resistance at $80 retested.”

Crude oil for December delivery rose as much as 50 cents, or 0.7 percent, to $77.96 a barrel in electronic trading on the New York Mercantile Exchange, and was at $77.91 at 11:29 a.m. London time.

Yesterday, the contract dropped $2.09, or 2.6 percent, to $77.46, the lowest settlement since Oct. 14. Prices have gained 73 percent this year.

“Eighty dollars has proven to be a real stumbling block for crude oil,” said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. “We’re going to need a more definite increase in demand in order to push prices through that level. Currencies, equities and other commodities will be pointers in the meantime.”

The Commerce Department’s report on gross domestic product is due at 8:30 a.m. in Washington.

‘Overdue Correction’

“After several weeks of heady gains in a number of markets, we are finally seeing a long overdue correction set in,” said Edward Meir, senior analyst with MF Global Ltd. in Connecticut. “We may get one more leg lower in commodities, particularly if the U.S. GDP figures surprise to the upside.

“This scenario will surely boost the dollar yet again,” Meir said, “as it will likely convey the message towards tighter money and higher rates may soon begin.”

A stronger U.S. currency often diminishes investors’ demand for dollar-priced assets used to hedge against inflation, such as gold and crude. The dollar was at $1.4744 per euro as of 11:17 a.m. in London.

Inventories of crude oil rose 778,000 barrels to 339.9 million in the week ended Oct. 23, the Energy Department report showed yesterday. A 1 million-barrel drop was forecast, according to a Bloomberg News survey.

Distillate Supplies

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.

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

Brent crude oil for December traded up 46 cents at $76.32 a barrel on the ICE Futures exchange at 11:14 a.m. London time. Prices dropped $2.06, or 2.6 percent, to end the session at $75.86 a barrel yesterday.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

Last Updated: October 29, 2009 07:30 EDT