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Oil Falls Second Day as Gasoline Supply Surges Amid Fiscal Talks

Dec. 28 (Bloomberg) -- Oil fell for a second day as gasoline supplies climbed to a nine-month high on weaker demand and as U.S. lawmakers gave little sign that they will reach an agreement to avert a fiscal crisis.

Prices dropped as much as 0.6 percent after the Energy Department said gasoline stocks rose to 223.1 million barrels last week and distillate inventories increased. President Barack Obama summoned congressional leaders to a meeting three days before a year-end deadline to avoid $600 billion in spending cuts and tax increases, collectively known as the fiscal cliff.

“We have a big gain in gasoline stocks and demand has been really soft,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The president is going to sit down this afternoon with everybody. I don’t think they’ll get a lot done.”

West Texas Intermediate oil for February delivery fell 21 cents to $90.66 a barrel at 12:51 p.m. on the New York Mercantile Exchange. Prices have gained 2.3 percent this week.

Oil traded at $91.24 a barrel before the release of the report at 11 a.m. in Washington, two days later than usual because of the Christmas holiday. Trading volume for WTI futures contracts was down 49 percent from the 100-day average.

Brent Slides

Brent oil for February settlement slid 61 cents, or 0.6 percent, to $110.19 a barrel on the London-based ICE Futures Europe exchange. The number of contracts trading was 45 percent lower than the 100-day average. The European benchmark crude was at a premium of $19.60 to WTI.

WTI has declined 8.3 percent in 2012 as a U.S. shale boom deepened the glut at Cushing, Oklahoma, America’s biggest storage hub. That has left it at an average $17.47 below Brent this year, compared with a premium of about 95 cents in the 10 years through 2010. Brent, the benchmark grade for more than half the world’s crude, has risen 2.6 percent this year.

“The oil market is having a knee-jerk reaction to the report,” said Carl Larry, president of Oil Outlooks & Opinions LLC in New York.

Gasoline inventories jumped 3.78 million barrels last week to the highest level since March 23, the Energy Department said. Stockpiles were forecast to increase 850,000 barrels, according to the median of 10 analyst estimates in a Bloomberg survey.

Total petroleum consumption in the U.S. fell 5.5 percent last week to 18.9 million barrels a day, the biggest drop since Aug. 17, the report showed.

Consumption Issue

“The bigger issue is the consumption side,” O’Grady said. “It’s a reflection of concerns about the economy and the fiscal cliff is probably having an effect on it.”

Distillate supplies, which include heating oil and diesel, gained 2.42 million barrels to 119.4 million. Stockpiles were estimated to drop 850,000 barrels from the prior week.

Inventories of crude oil slipped 586,000 barrels to 371.1 million, the department said. Supplies were forecast to decrease 1.75 million barrels. Stockpiles at Cushing, Oklahoma, the delivery point for New York futures, increased 4.7 percent to a record 49.2 million barrels.

“The Cushing inventory level is very negative,” Larry said. “The fiscal cliff is the 800-pound gorilla in the room. If we don’t get a resolution, we’ll have a weaker economy and weaker oil demand.”

Budget Talks

Obama, who had been negotiating one-on-one with House Speaker John Boehner, will meet today with Republicans Boehner and Senate Minority Leader Mitch McConnell, as well as Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, both Democrats.

Obama plans to propose a scaled-back package, a Democratic aide with knowledge of the president’s plans said. The meeting is scheduled for 3 p.m. at the White House.

The U.S. is the world’s largest oil-consuming country, followed by China and Japan.

“If they don’t do something to reach a deal, oil futures are going to come off pretty strong,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors.

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