By Grant Smith Dec. 17 (Bloomberg) -- Oil traded near its lowest price in two weeks as retreating equity indexes countered signs that the economic recovery is eroding surplus fuel inventories. Oil reversed gains as the Stoxx Europe 600 Index slipped. The commodity earlier rose as much as 0.8 percent after the Labor Department said yesterday that applications for unemployment insurance dropped to the lowest in three weeks. U.S. crude inventories fell the most since May 2008 last week, according to the Energy Department. “The physical market is tightening a little bit with the colder temperatures,” said Tobias Merath, head of commodities at Credit Suisse Group in Zurich. “But looking further into the future, inventories are still high, so I don’t know much further upside there is. Prices will remain around $90.” Crude for January delivery fell as much as 69 cents, or 0.8 percent, to $87.01 a barrel on the New York Mercantile Exchange and traded at $87.35 at 1:18 p.m. London time, after advancing earlier to $88.37. Brent crude for February settlement was down 39 cents at $91.21 a barrel after rising as high as $92.15 on the ICE Futures Europe exchange in London. Yesterday, crude fell 1 percent in New York to $87.70, the lowest settlement since Dec. 1. Futures have fallen 0.5 percent this week after losing 1.6 percent last week. The January contract expires Dec. 20. Equities Fall European equities fell as an agreement among the region’s leaders to create a permanent crisis-management mechanism failed to ease concern the debt crisis will spread. The benchmark Stoxx Europe 600 Index fell 0.4 percent to 276.51 at 1:18 p.m. in London, paring its gain for the week to 0.1 percent. Oil may decline next week on speculation the U.S. Energy Department will report an increase in supplies after the biggest drawdown in more than eight years in this week’s data. Eighteen of 34 analysts and traders, or 53 percent, forecast crude will fall through Dec. 23. Nine respondents, or 26 percent, predicted prices will climb and seven estimated there will be little change. Last week, 46 percent of survey respondents forecast the market would drop. “People are saying the economy is picking up, and if that is the point, it should lead to either higher demand for crude, or the U.S. dollar trading higher as people get more confident,” said Jonathan Barratt, managing director of Commodity Broking Services in Sydney. U.S. crude stockpiles fell 9.85 million barrels in the week ended Dec. 10 to 346 million, according to the Energy Department. That’s the biggest decrease since May 2008. U.S. applications for jobless-insurance payments fell to 420,000, the Labor Department said. Economists had projected a median increase in claims to 425,000, based on a Bloomberg News survey. Builders in November began work on more homes for the first time in three months. Housing starts rose to a 555,000 annual rate last month, up 3.9 percent from October, Commerce Department data showed yesterday. --With assistance from Julie Cruz in Frankfurt and Yee Kai Pin and Ann Koh in Singapore. Editors: John Buckley, Raj Rajendran To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

Source