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Crude Oil Drops to Five-Week Low on Weaker U.S. Growth Outlook

Crude oil fell to a five-week low in New York and reached a record discount against Brent crude as a drop in U.S. personal spending signaled growth is slowing in the world’s biggest oil-consuming country.

Futures dropped 1.2 percent after the Commerce Department in Washington said purchases slipped 0.2 percent in June, the first decline in almost two years. The decrease in prices accelerated after President Barack Obama signed a bill to raise the U.S. debt limit by at least $2.1 trillion, averting by hours a first-ever U.S. financial default.

“There’s a great deal of nervousness about the direction of the economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “All of the talk of a possible default has already done a lot of damage to consumer confidence. The economy wasn’t looking good before today, and now it’s looking worse.”

Crude oil for September delivery fell $1.10 to $93.79 a barrel on the New York Mercantile Exchange, the lowest settlement since June 28. Prices have gained 15 percent in the past year.

Prices fell as low as $93.08 in electronic trading before paring losses after the American Petroleum Institute reported that U.S. crude-oil stockpiles dropped 3.31 million barrels to 354.9 million. Oil declined $1.45, or 1.5 percent, to $93.44 a barrel in electronic trading at 4:32 p.m.

Brent oil for September settlement declined 35 cents, or 0.3 percent, to end the session at $116.46 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract reached a record premium of $22.67 a barrel to New York futures based on closing prices.

Slowing Economy

Consumer purchases were forecast to increase 0.1 percent, according to the median estimate of 77 economists surveyed by Bloomberg News. Incomes grew at the slowest pace since November and the savings rate climbed.

“The economy appears to be grinding to a halt,” said Phil Flynn, vice president of research at PFGBest in Chicago. “A slowing U.S. economy changes the demand outlook for oil. We may end up with a glut, not shortages, later this year.”

The U.S. probably didn’t create enough jobs in July to cut unemployment, according to a Bloomberg News survey of economists before the Labor Department’s employment report on Aug. 5.

“There’s been plenty of bad economic news,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “We’re going to be white-knuckling it until Friday when we will see if employment rose. That should be the next catalyst for a major move.”

Equities Decline

The Standard & Poor’s 500 Index fell 2.6 percent to 1,254.05 at 4:31 p.m., dropping a seventh straight day in its longest slump since 2008. The Dow Jones Industrial Average declined 2.2 percent to 11,866.62.

The dollar rose 0.4 percent to $1.4197 against the euro, from $1.425 yesterday, after climbing to $1.4151, the highest level since July 21. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.

“We’re tracking the dollar and equities,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan yesterday.

Federal Reserve

Federal Reserve policy makers may start weighing more steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts. During the first half of 2011, the Fed carried out a $600 billion program in asset purchases known as quantitative easing.

Tropical Storm Emily’s maximum winds have strengthened to 45 mph from 40 mph south of Puerto Rico and at least two computer forecast models suggest it will dissipate near the island of Hispaniola, the National Hurricane Center said today. Emily is 215 miles (345 kilometers) south-southeast of San Juan, Puerto Rico and moving west at 12 mph, according to an advisory issued at 2 p.m. in Miami.

“Prices would be a lot lower if it weren’t for Emily and the prospect that the Fed might announce a new round of quantitative easing,” Flynn said.

An Energy Department report tomorrow may show U.S. crude oil supplies climbed 1.5 million barrels last week, according to the median of 14 estimates in a Bloomberg News survey.

“A rebound in the dollar and weaker equities will keep oil down until at least the inventory reports,” said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania.

Oil volume in electronic trading on the Nymex was 548,471 contracts as of 4:31 p.m. in New York. Volume totaled 689,962 contracts yesterday, the most since July 14 and 3 percent above the average of the past three months. Open interest was 1.54 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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