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Oil falls from 4-month high amid debt-ceiling negotiations

Oil dropped from the highest level in almost four months on concern that debt-ceiling talks will harm the U.S. economy and as a gauge of New York-area manufacturing contracted for a sixth straight month.

Futures in New York declined as much as 0.6 percent after President Barack Obama said Monday he won’t bargain with Republicans over raising the government’s debt limit and called for separate discussions on spending cuts. The Federal Reserve Bank of New York’s general economic index fell to minus 7.8 this month from a revised minus 7.3 in December.

“Concerns about a possible U.S. default are starting to be felt,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “This is going to roil all the markets.”

Crude oil for February delivery decreased 13 cents to $94.01 a barrel on the New York Mercantile Exchange. Trading volume was 17 percent above the 100-day average. The contract increased to $94.14 Monday, the highest settlement since Sept. 18. Prices are down 4.8 percent from a year earlier.

Brent for February settlement dropped 68 cents, or 0.6 percent, to $111.20 a barrel on the London-based ICE Futures Europe exchange. February futures expire tomorrow. The more-active March contract fell 44 cents, or 0.4 percent, to $110.51. Volume was 22 percent above the 100-day average.

The front-month European benchmark contract was at a premium of $17.19 to West Texas Intermediate oil traded in New York. The spread narrowed to $17.08 at the settlement on Jan. 11, the narrowest level since Sept. 19.

The Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion debt limit.

The debt ceiling has been lifted 79 times since its creation in 1917, 49 of those times during Republican administrations.

Standard & Poor’s lowered the U.S. credit rating in August 2011 after the most recent showdown over the threshold. Oil prices tumbled 7.2 percent the month of the downgrade and an additional 11 percent in September 2011.

“Some fears about the debt ceiling are coming into the market,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “The debt ceiling was ignored for a while on expectations that they would muddle through, but there’s a chance they won’t. All risk assets are reacting.”

U.S. crude oil inventories probably increased a second week after production climbed to the highest level in almost 20 years, a Bloomberg survey showed. Stockpiles rose by 2.1 million barrels in the seven days ended Jan. 11, according to the median of 10 analyst estimates before an Energy Information Administration report tomorrow.

Production advanced 17,000 barrels a day to 7 million in the week ended Jan. 4, the most since March 1993, the EIA, the Energy Department’s statistical arm, said last week.

Gasoline supplies rose 2.6 million barrels, according to the survey. An advance of that size would leave stockpiles at 235.7 million barrels, the highest level since February 2011. Inventories of distillate fuel, a category that includes heating oil and diesel, probably rose 1.5 million barrels.

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