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Oil Falls Near Three-Month Low as Housing Start Drop Damps Growth Outlook

Oil fell to the lowest price in almost three months as U.S. housing starts dropped and industrial output stalled in April, damping optimism about the economic and fuel-demand outlook.

Crude slipped 0.5 percent after the Commerce Department said work began on 523,000 houses at an annual pace, down 11 percent from March. Production at factories, mines and utilities was unchanged, the Federal Reserve reported today. Yesterday, the dollar touched the highest level against the euro since March 29, reducing the appeal of commodities.

“The terrible housing numbers added to worries about the economy and demand destruction,” said Phil Flynn, vice president of research at PFGBest in Chicago. “We’re facing what could be the biggest washout since 2008, especially if the dollar continues to rally.”

Crude oil for June delivery dropped 46 cents to $96.91 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 22. Futures have risen 38 percent in the past year.

Prices rebounded from the settlement after the American Petroleum Institute reported at 4:30 p.m. in Washington that U.S. crude-oil stockpiles increased 2.67 million barrels to 369.9 million. June oil rose 1 cent to $97.38 a barrel in electronic trading at 4:31 p.m.

Brent oil for July settlement declined 85 cents, or 0.8 percent, to end the session at $109.99 a barrel on the London- based ICE Futures Europe exchange.

Oil in New York tumbled from a record $147.27 a barrel in July 2008 to a low of $32.40 in December of that year as the deepest economic slump since World War II reduced fuel demand.

Home Construction

Builders were forecast to start constructing 569,000 homes in April, according to the median forecast of 74 economists surveyed by Bloomberg News.

Total U.S. manufacturing fell 0.4 percent, while it rose 0.2 percent excluding automobiles, according to the Federal Reserve report. Economists had forecast a 0.4 percent gain in industrial production, according to the median estimate in a Bloomberg News survey.

“Some negative economic numbers have taken a lot of the froth out of the market,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Focus has shifted to the huge surplus we have on hand.”

The Standard & Poor’s 500 Index slipped 0.1 percent to 1,328.27, and the Dow Jones Industrial Average dropped 69.25 points to 12,479.12 at 3:12 p.m.

A ‘Dud’

“Economic news has been driving the market lately, and there hasn’t been a lot of good economic news,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The summer driving season was the last hope for the bulls, but now that looks like a dud.”

U.S. gasoline consumption peaks between the Memorial Day holiday in late May and Labor Day in early September, when Americans traditionally take vacations. Demand for the motor fuel dropped 1.3 percent to 8.83 million a day in the week ended May 6, the lowest level since the seven days ended Feb. 11, the Energy Department said last week.

A department report tomorrow will probably show U.S. crude oil inventories climbed to a two-year high last week as fuel stockpiles increased.

Supplies rose 1.7 million barrels in the week ended May 13, according to the median of 15 estimates in a Bloomberg News survey of analysts. A gain of that size would leave inventories at 372 million barrels, the highest level since the week ended May 1, 2009.

Market Pressure

“Most folks are expecting another inventory build in tomorrow’s report,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “This is putting pressure on the market.”

Gasoline stockpiles increased 950,000 barrels last week, the survey showed. Inventories of distillate fuel, a category that includes heating oil and diesel, probably climbed by 250,000 barrels.

Mississippi River water pouring through 15 gates on Louisiana’s Morganza floodway has greatly reduced the risk of flooding to oil refineries that account for about 14 percent of U.S. capacity.

The Mississippi crested at about 17 feet in New Orleans yesterday, 2.5 feet below the forecast, and is expected to top out at 45 feet tomorrow in Baton Rouge, below a record 47.5 that was expected by May 22, according to the U.S. Lower Mississippi River Forecast Center’s website.

“Overnight news continues to indicate that the flooding problems at refineries on the Mississippi River are unlikely to be as bad as previously feared,” JPMorgan Chase & Co. analysts led by New York-based Lawrence Eagles, said in a report today. “The opening of the Morganza spillway over the weekend has spared the worst of the flooding for the concentration of refining assets near Baton Rouge, New Orleans and St. Charles.”

Libyan Defection

Libya’s top oil official, Shokri Ghanem, defected from the regime of Muammar Qaddafi, said a spokesman for the rebel group at war with the country’s leader. Ghanem, who chaired the state- owned National Oil Corp., arrived in the Tunisian capital Tunis, Mahmud Alwerfalli said today in Doha.

Clashes between Qaddafi’s troops and opposition forces in Libya have killed thousands since February and curbed oil output in the country, which holds Africa’s biggest reserves.

Oil volume in electronic trading on the Nymex was 715,399 contracts as of 3:12 p.m. in New York. Volume totaled 678,592 yesterday, 5.8 percent below the average of the past three months. Open interest was 1.63 million contracts.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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