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Oil Declines After U.S. Fuel Supplies Increase as Demand Falls

Crude oil declined after the U.S. government reported that fuel inventories climbed, demand dropped and retail sales stalled in the world’s biggest oil-consuming country.

Futures decreased 1.4 percent after the Energy Department said gasoline supplies rose 1.94 million barrels last week, the biggest gain since June. Fuel use fell 3.8 percent to 18.7 million barrels a day. Refineries operated at 87 percent of capacity, down 2.3 percentage points from the prior week. The Commerce Department said retail sales were unchanged in August.

“The market is unsettled because the product builds were huge, especially given that refinery runs dropped,” said Jason Schenker, the president of Prestige Economics, an energy advisory company in Austin, Texas. “The retail sales numbers are another sign that the U.S. economy is stagnating, which is a big concern for the oil market.”

Crude oil for October delivery declined $1.30 to settle at $88.91 a barrel on the New York Mercantile Exchange. Yesterday, the contract climbed 2.3 percent to $90.21, the highest settlement since Aug. 3.

Brent oil for October settlement rose 51 cents to $112.40 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $23.49 to U.S. futures, down from a record $26.62 on Sept. 6 based on settlement prices.

Supplies of distillate fuel, a category that includes heating oil and diesel, increased 1.71 million barrels to 158.5 million, the highest level since February, the report showed.

Crude Oil Supplies

Inventories of crude oil declined 6.7 million barrels to 346.4 million, the biggest drop since December, the report showed. Supplies at Cushing, Oklahoma, the delivery point for West Texas Intermediate crude, the U.S. benchmark, fell 460,000 barrels to 32.2 million, the lowest level since November.

Output in the Gulf of Mexico, which accounts for 27 percent of U.S. supply, was cut as much as 61 percent last week after Tropical Storm Lee shut production platforms.

“That’s a huge drawdown in crude supplies,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “It’s being discounted because of the tropical storms, which reduced production.”

Gasoline Demand

Gasoline consumption dropped 1.2 percent to 8.85 million barrels a day in the week ended Sept. 9, the lowest level since May. U.S. gasoline demand for the fuel peaks during the driving season, which began with the Memorial Day holiday in late May and ended with Labor Day on Sept. 5.

“We’ve got ongoing weakness for gasoline, regardless of the storms,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The crude draw was due to Tropical Storm Lee and won’t be an ongoing factor.”

U.S. retail sales were forecast to climb 0.2 percent, according to the median forecast of 83 economists surveyed by Bloomberg News. Wholesale prices were also little changed in August as costs decreased for energy and automobiles, according to a Labor Department report today. The producer price index was unchanged after a 0.2 percent increase in July.

French President Nicolas Sarkozy and German Chancellor Angela Merkel are “convinced” Greece will remain in the euro area, according to a statement issued by Sarkozy after they spoke to Greek Prime Minister George Papandreou by telephone today. Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout.

Dollar Declines

The dollar dropped 0.6 percent to $1.3753 against the euro, from $1.3678 yesterday, after the statement’s release. A weaker U.S. currency bolsters the appeal of dollar-denominated raw materials as an investment.

The European Central Bank said it will lend two banks dollars tomorrow, signaling they are having borrowing difficulties.

“The U.S. economy isn’t looking that good,” said Carl Larry, director of energy derivatives and research with Blue Ocean LLC in New York. “We’re continuing to look at the European debt crisis. It’s no longer so much about the Greek debt itself, but about the banks that hold it, especially the French banks.”

Credit Agricole SA and Societe Generale SA, France’s second- and third-largest banks, had their long-term credit ratings cut one level by Moody’s Investors Service. Moody’s put the companies, along with BNP Paribas SA, on review for a possible downgrade on June 15, citing the risks posed by their investments in Greece.

Geithner’s Trip

U.S. Treasury Secretary Timothy F. Geithner will meet EU finance ministers in Wroclaw, Poland, on Sept. 16 and Sept. 17 to discuss efforts to contain the region’s sovereign-debt troubles, according to a euro-area official who spoke on condition of anonymity.

“Unless the market can close above $90 you have to be a seller,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “I think we’ll probably test $75 before long.”

Oil volume in electronic trading on the Nymex was 645,064 contracts as of 3:09 p.m. in New York. Volume totaled 815,122 contracts yesterday. Open interest was 1.46 million contracts.

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