Oil Drops as Slowing German Economy Signals Demand May Falter

Crude oil dropped, bring its decline this month to 9.5 percent, after Germany’s economy almost stalled in the second quarter, bolstering concern that fuel consumption will diminish.

Futures fell 1.4 percent after Germany’s Federal Statistics Office said gross domestic product rose 0.1 percent from the first quarter. European economic growth slowed during the period as the sovereign-debt crisis worsened. French President Nicolas Sarkozy said today that his nation and Germany will propose a financial transaction tax for the region.

“The disappointing German GDP number is responsible for the bulk of the sell-off we’ve seen today,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Germany was expected to carry the entire euro-zone and now its economy appears to be faltering.”

Crude oil for September delivery declined $1.23 to settle at $86.65 a barrel on the New York Mercantile Exchange. Prices have dropped 5.2 percent this year.

Prices pared declines after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude supplies rose 1.75 million barrels to 350.4 million. September oil was down 86 cents at $87.02 a barrel at 4:32 p.m. in electronic trading.

Brent oil for September settlement fell 44 cents, or 0.4 percent, to end the session at $109.47 a barrel on the ICE Futures Europe in London. The September contract expired today. October oil dropped 71 cents to $109.13.

The front-month contract of the European benchmark was at a $22.82 a barrel premium to U.S. futures, compared with a record $23.79 on Aug. 10, based on closing prices.

U.S. Manufacturing

Oil rebounded from the day’s low of $85.62 after data showed that U.S. manufacturers churned out more cars, computers and furniture in July. The 0.9 percent gain in output at factories, mines and utilities was almost twice the median forecast of economists surveyed by Bloomberg News and the biggest gain of the year, Federal Reserve figures showed.

Economists had forecast German growth of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey. GDP for the first three months of the year was revised from 1.5 percent to 1.3 percent by the Wiesbaden-based statistics office. Germany is Europe’s largest economy and the world’s seventh-biggest oil-consuming country.

Futures dropped “on concerns about the euro-zone,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. “The economic weakness raises concerns about the global demand picture.”

Gross domestic product in the 17-nation euro area rose 0.2 percent from the first quarter, when it increased 0.8 percent, the European Union’s statistics office in Luxembourg said today. That’s the worst performance since the region emerged from a recession in late 2009. Economists forecast the economy would expand 0.3 percent, according to a Bloomberg News survey.

Financial Transaction Tax

German Chancellor Angela Merkel met the French President today in Paris. The two countries will propose the financial transaction tax in September, Sarkozy said after the talks. They also proposed European Union President Herman Van Rompuy to head a “euro council,” he told reporters today.

“The overall picture is that worldwide economic activity is slowing down a bit, and, of course, that’s bearish for oil,” said Sintje Diek, an analyst at HSH Nordbank in Hamburg, who correctly predicted that Brent prices would fall to $100 this summer. “There are fears the recovery in the euro zone will be very sluggish because of the debt crisis. Maybe we’ll see lower prices than $100.”

Housing Starts

U.S. housing starts fell 1.5 percent to a 604,000 annual rate last month, Commerce Department figures showed today in Washington. June’s 613,000 pace was less than previously estimated, according to the department. Building permits, a proxy for future construction, also dropped.

The Standard & Poor’s 500 Index declined 1 percent to 1,192.76 and the Dow Jones Industrial Average fell 0.7 percent to 11,405.93. The dollar rose 0.3 percent to $1.4408 against the euro from $1.4445 yesterday. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.

Growth in China, the world’s second-biggest oil consumer, is “significantly moderating,” the Conference Board, a New York-based research organization, said today. The nation’s expansion may cool to 9.2 percent in the third quarter from 9.5 percent in the previous three months, the China Securities Journal reported today, citing the State Information Center.

The U.S., China and the European Union were responsible for 48 percent of global oil demand in 2010, according to BP Plc’s Statistical Review of World Energy.

“The economic news is still bearing down on this market and driving prices lower,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “We still don’t know how much the economy will slow and what that will mean for oil demand.”

U.S. Stockpiles

An Energy Department report tomorrow may show U.S. crude supplies fell as imports decreased and refineries ran near the highest rates of the year, according to a Bloomberg News survey. Inventories dropped 500,000 barrels to 349.3 million last week, the lowest level since March 4, according to the median of 16 analyst estimates in the survey. Gasoline stockpiles fell 1.18 million barrels, according to the survey.

Oil volume in electronic trading on the Nymex was 676,535 contracts as of 3:35 p.m. in New York. Volume totaled 587,209 contracts yesterday, 14 percent below the average of the past three months. Open interest was 1.56 million contracts.