Sept. 23 (Bloomberg) -- Crude oil fell the most in five weeks in New York after a U.S. Energy Department report showed an unexpected increase in stockpiles as refineries idled units for seasonal maintenance and fuel demand dropped.

Inventories climbed 2.86 million barrels to 335.6 million last week, the department said. A 1.4 million-barrel drop was forecast, according to the median of 17 analyst responses in a Bloomberg News survey. Supplies of gasoline and distillate fuels, such as heating oil and diesel, rose more than estimated.

“These numbers are bearish across the board,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “We’ve been in a $60 to $75 range since early July. Prices should go down and test the bottom end of the range after these numbers.”

Crude oil for November delivery fell $2.79, or 3.9 percent, to settle at $68.97 a barrel on the New York Mercantile Exchange. It was the biggest one-day drop for a front-month contract since Aug. 14.

“This was a pretty ugly report,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “We broke through the 100-day moving average around $69.53, which is a negative technical sign.”

The November contract’s move below the average signals to so-called technical traders that prices will move lower.

Futures have gained 55 percent this year on speculation global fuel consumption may recover as economies emerge from the recession and as a weakening dollar encourages investors to purchase commodities as an inflation hedge.

Lending Rate

Oil rebounded from the day’s lows when the dollar dropped after the Federal Reserve signaled it intends to keep holding down borrowing costs. The Fed kept its target rate for overnight lending between banks at zero to 0.25 percent at the conclusion of its two-day policy meeting today.

“This market is fundamentally weaker than $70,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “The crude market has taken signals from the stock market, the dollar and reports from investment banks. There comes a point when you have to pay attention to the fundamentals, which are really ponderous.”

It was the biggest increase in crude oil inventories since the week ended July 24, the Energy Department report showed. The gain left stockpiles 9.1 percent above the five-year average. Imports climbed 10 percent to 9.79 million barrels a day, the highest since July.

Refineries operated at 85.6 percent of capacity last week, down 1.4 percentage points from the previous week, the Energy Department said. U.S. refiners often idle units for maintenance in September and October as gasoline demand drops and before heating-oil use increases.

Tumbling Demand

U.S. fuel consumption dropped 3.3 percent to 18.5 million barrels a day, the lowest since the week ended June 26. Gasoline use slipped 2.3 percent to 8.79 million barrels a day, the lowest since January.

“Inventories fell much more than was expected,” Bentz said. “The report shows that demand is terrible.”

Gasoline supplies rose 5.41 million barrels to 213.1 million, the biggest increase since January, according to the report. That left stockpiles 6.5 percent above the five-year average for the period. A 500,000 barrel gain was forecast.

“Gasoline was the only semi-bright spot and this shows that the fundamentals of that market are really deteriorating,” O’Grady said.

Fuel Stockpiles

Stockpiles of distillate fuel rose 2.96 million barrels to 170.8 million, the highest since January 1983, according to the department. The increase left supplies 28 percent above the five-year average. Analysts forecast a 1.45 million-barrel gain.

Gasoline for October delivery declined 7.67 cents, or 4.3 percent, to $1.7049 a gallon in New York, the lowest settlement since July 14. Heating oil for October delivery fell 5.27 cents, or 2.9 percent, to end the session at $1.7594.

“The product markets are very weak,” Emerson said. “There’s enormous spare crude-oil capacity. There’s downside risk, it’s impossible to know if it’s $5, $10 or $20.”

The Organization of Petroleum Exporting Countries agreed at its Sept. 9 meeting in Vienna to maintain production quotas at 24.845 million barrels a day. Members governed by quotas are producing 1.4 million barrels a day over the target, according to the International Energy Agency.

Saudi Arabian Oil Co., the world’s biggest state oil company, sees little chance of pumping crude from idle fields next year because a recovery in world demand has yet to begin, its CEO Khalid al-Falih said in an interview in Jeddah, on the Red Sea coast, on Sept. 21.

The desert kingdom has idled about 4 million barrels of crude oil a day, according to the oil ministry.

Brent Contract

Brent crude for November settlement fell $2.54, or 3.6 percent, to end the session at $67.99 a barrel on the London- based ICE Futures Europe exchange.

Oil volume in electronic trading on the Nymex was 497,845 contracts as of 3:09 p.m. in New York. Volume totaled 373,634 contracts yesterday, 30 percent lower than the average over the past three months and the least since June 29. Open interest was 1.12 million contracts, the lowest since June 24.

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

Last Updated: September 23, 2009 16:31 EDT