US oil futures carried losses of almost 2% on Wednesday as a surprise increase in domestic crude inventories added to worries over weak economic data.
Jitters over the higher stockpiles piled on top of fears about the unsettled debate on raising the US debt ceiling before an August 2 deadline to avoid a disastrous default.
US crude weakened further against Brent oil. The WTI/Brent spread widened to above USD 20 a barrel after ending below USD 19 on Tuesday, on spread trading, traders said.
US crude for September delivery was down USD 1.69 at USD 97.90 a barrel by 2 pm EDT (1800 GMT), after sliding to a session low of USD 97.28. In London, ICE September Brent was off 56 cents at USD 117.72, below its early high of USD 118.50.
US crude oil inventories unexpectedly rose by 2.3 million barrels last week, boosted by the first releases from the Strategic Petroleum Reserve, part of a coordinated move by members of the International Energy Agency announced in late June to cover supply losses due to the conflict in Libya.
The increase was almost entirely due to movement of crude from the government's reserves into commercial stockpiles.
Analysts polled by Reuters had projected a 1.7 million barrel drawdown, on average, in crude inventories. SPR stocks fell by 2.268 million barrels as companies received initial deliveries from those reserves.
US distillate and gasoline stockpiles rose much more than expected last week, also pressuring US crude futures.
The US government's latest inventory report "was clearly a disappointment ... although we are trading much more off of the problems of the broader financial market and debt ceiling", said Bill O'Grady, chief investment strategist at Confluence Investment Management in St. Louis, Missouri.
Gulf of Mexico storm fears
But losses were limited by storm fears in the Gulf of Mexico, which has caused Royal Dutch Shell to pull support personnel in its area platforms.
Royal Dutch Shell pulled 70 support staff from platforms in the Gulf of Mexico due to the threat of tropical weather, the company said. The first major storm of the year Gulf of Mexico storm of the year is brewing over the northwestern Carribbean Sea, with an upgraded 100% chance of becoming tropical cyclone as it heads northwest to the Texas coast, posing a threat to energy facilities in the area.
The Gulf of Mexico accounts for 29% of US oil production and 13% of natural gas. The refineries in the region holds 40% of US oil refining capacity as well as 30% of US natrual gas processing plant capacity, according to the EIA.
In earlier data, demand for long-lasting US manufactured goods -- from toasters to aircraft -- fell in June and a guage of business spending plans slipped, adding to concerns the economy will take longer to emerge from its current soft patch.
Uncertainity unnerves
Deeply divided Republican and Democratic leaders in Washington are still scrambling to find common ground with less than a week before the government hits its borrowing limit, triggering a possible default that would shake global markets.
"Should the US default on its debt, the effect on the oil markets will be bifurcated," said said Jason Schenker, president and chief economist of Prestige Economics LLC in Austin, Texas.
"For WTI (US crude) prices will fall on economic growth concerns. For Brent crude, which has a more global benchmark status than US crude, it will get support from a lower dollar and continued global growth expectations," Schenker added.
Global stock markets fell as the US edged towards debt default by the August 2 deadline. Wall Street slid as anxiety grew over the debt debate in Washington and weak economic data stoked concerns about further slowing of the economy.
The dollar was up 0.85% against a basket of currencies rebounding from sell-off as political wrangling over raising the debt ceiling continued.
