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Oil Falls on European Divisions, Fed Report of ‘Modest’ Growth

Crude oil fell from a one-month high after a split emerged between France and Germany on proposals to increase the European bailout fund and the Federal Reserve described the pace of U.S. economic growth as “modest.”

Futures dropped 2.5 percent as euro-area leaders assembled in Frankfurt seeking to narrow divisions before a summit. The Fed said in its Beige Book survey that companies reported more doubt about the strength of the recovery. U.S. fuel use declined 2.2 percent to 18.3 million barrels a day last week, the least since May, the Energy Department said today.

“Markets are being hurt by questions about European plans to combat the debt crisis and the release of the Beige Book,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The market is incredibly fickle right now. It takes very little to get it to reverse direction.”

Crude oil for November delivery fell $2.23 to settle at $86.11 a barrel on the New York Mercantile Exchange. The contract touched $89.51 earlier today, the highest intraday level since Sept. 16. Futures are down 5.8 percent this year.

Brent oil for December settlement decreased $2.76, or 2.5 percent, to end the session at $108.39 a barrel on the London-based ICE Futures Europe exchange. The spread between the December Brent and Nymex crude contracts narrowed to $22.25 from a record high of $27.88 on Oct. 14.

Goldman Sachs Group Inc. said in a report that an improving economic outlook in Europe and declining crude supplies may present “a real upside risk” to Brent oil contracts traded in London. The backwardation in Brent contracts, where prices for soonest delivery are higher than those for later months, creates an incentive to draw from inventories, Goldman Sachs said.

Franco-German Split

A Franco-German split on the role of the European Central Bank in leveraging the euro bailout fund emerged at an event in Frankfurt today to mark the conclusion of Jean-Claude Trichet’s term as the ECB’s president. The disagreements among policy makers came as banks lobbied against forced recapitalization and deeper writedowns on Greek debt.

As French media reported his wife was giving birth to his first daughter, French President Nicolas Sarkozy left Paris to meet German Chancellor Angela Merkel, Trichet and International Monetary Fund Managing Director Christine Lagarde at the event at the Frankfurt Opera House, according to a spokesman for Sarkozy.

European Union leaders are scheduled to meet on Oct. 23 in Brussels to discuss ways to combat the credit crisis.

“We continue to handicap what will come out of the meeting next week,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management, formerly MFC Global, in Boston.

Regional Banks

The Fed’s regional banks in Atlanta, New York, Minneapolis and Dallas said growth in their regions was modest, while Chicago said the economy had “picked up some” and Philadelphia described conditions as “mixed, with more positive sectors than negative ones compared with the previous” report. The Richmond Fed said conditions were “weak or weakening in most sectors.”

The Beige Book survey, released two weeks before each policy meeting, is based on information gathered by officials at the Fed’s 12 regional banks. Today’s report covers information collected on or before Oct. 7 and was compiled by staff at the Chicago Fed.

“The Beige Book showed that the economy is limping along,” said Jason Schenker, president of Prestige Economics, an energy advisory company in Austin, Texas. “We’re in a period of very tepid, soft growth.”

U.S. Stockpiles

Prices rose to a one-month high earlier when the Energy Department reported that U.S. crude and fuel stockpiles dropped last week. Supplies of crude oil fell 4.73 million barrels to 332.9 million, the lowest level since February 2010. Inventories were forecast to climb 2 million barrels, according to the median of 13 analyst estimates in a Bloomberg News survey.

Gasoline supplies declined 3.32 million barrels to 206.3 million last week, the lowest level since May, the report showed. A 1.5 million-barrel drop was forecast, according to the median of 13 analyst projections in the Bloomberg News survey.

Consumption of gasoline dropped 4.6 percent to 8.6 million barrels a day, the lowest level since February, the report showed. The decline was the largest since December.

“Today’s report makes it clear that demand is very weak,” Flynn said.

Gasoline for November delivery decreased 7.54 cents, or 2.7 percent, to $2.6715 a gallon in New York.

Inventories of distillate fuel, a category that includes heating oil and diesel, decreased 4.27 million barrels to 149.7 million, the biggest drop since November, the department said. Analysts projected a 1.5 million-barrel decline.

“There can be a lot of noise when you look at the week-to-week numbers,” Hodge said. “Until we have a clearer idea of where we are going on the economic front, the market will move back and forth in reaction to emotions.”

Oil volume in electronic trading on the Nymex was 578,211 contracts as of 3:26 p.m. in New York. Volume totaled 667,047 contracts yesterday. Open interest was 1.43 million contracts.

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