Oil hovers near $86 amid weak U.S. economy signs

Oil prices hovered near $86 a barrel Thursday amid more evidence of weak U.S. economic growth and expectations of an expanded bailout package to manage the eurozone's debt crisis.

By early afternoon in Europe, benchmark crude for November delivery was down 7 cents at $86.04 a barrel in electronic trading on the New York Mercantile Exchange. The contract, which expires later Thursday, fell $2.23 to settle at $86.11 in New York on Wednesday.

In London, Brent crude for December delivery was up 36 cents at $108.75 a barrel on the ICE Futures exchange.

Crude rose above $89 early in U.S. trading Wednesday, but reversed sharply amid concern the U.S. economy remains wobbly. The Federal Reserve's "Beige Book" showed only a slight increase in consumer spending last month while the economy expanded modestly in the Fed's 12 bank regions.

Traders are anxious ahead of this weekend's meeting of European leaders. Global stock markets have rallied this month on expectations the meeting will produce a plan to contain the region's debt crisis, and failure to do so could send equities and commodities tumbling next week.

"This market continues to gyrate daily in response to shifts in risk sentiment," energy consultant Ritterbusch and Associates said.

Stock, currency and commodity markets will continue to "respond feverishly" to almost anything said by European officials about the prospects for the EU summit this weekend, Ritterbusch said.

Analysts at Sucden Financial in London said "tentative economic conditions" in the eurozone were causing "high volatility and nervous trading across the board."

"We expect some further consolidation in the oil market ahead of the weekend, while currency movements will remain the main driver for some short-term direction," Sucden Financial said.

A weaker dollar tends to boost oil prices by making crude cheaper for traders using other currencies. On Thursday, the euro rose to $1.3799 from $1.3747 late Wednesday.

Barclays Capital said it expects Brent to average $115 next year as tighter crude supplies help offset slower growth in demand.

"The downside to oil prices is unlikely to be anything as severe" as during the 2008 to 2009 period when prices fell below $35 a barrel, Barclays said.

In other Nymex trading, heating oil rose 1.23 cents to $2.9923 per gallon and gasoline futures dropped 0.19 cents to $2.6430 per gallon. Natural gas were up 0.1 cent to $3.587 per 1,000 cubic feet.