(Reuters) - Brent crude rose above $118 on Thursday as a storm heading toward the Gulf of Mexico raised the threat of supply disruption and wary investors waited for U.S. lawmakers to break the impasse over the country's debt limit.
Brent gained 65 cents to $118.08 a barrel by 0927 GMT.
U.S. crude edged 20 cents higher to $97.60. The front-month contract hit a 7-session low of $96.51 earlier after U.S. data on Wednesday showed a rise in U.S. inventories.
"Despite the negative macroeconomic context, supply side impacts appear to be supporting prices," Natalie Robertson, an analyst at ANZ, said.
"The first storms of the Atlantic hurricane season have hit the headlines, reminding the market of potential supply disruptions from an expected active hurricane season."
Trade volumes were subdued by protracted uncertainty over the health of the world's biggest economy and top oil user.
Republicans and Democrats have been working behind the scenes on a compromise to avert a U.S. debt default, while the U.S. Treasury was expected to lay out a plan in the next few days for the government to operate if Congress misses an August 2 deadline to raise the U.S. debt ceiling.
"We are now starting to see markets beginning to seize up in light of the dangerous game of chicken being played by the politicians in Washington," Edward Meir of MF Global wrote in a daily note.
Unease about the U.S. impasse has weighed on a range of financial markets and driven relatively safe haven gold to a series of all-time highs.
RANGE-BOUND
Brent has traded in a roughly $10 range since the International Energy Agency in late June added additional supplies to the market following the failure of the Organization of the Petroleum Exporting Countries to agree to increase output.
"Producer governments continue to send the message that they are perfectly happy with prices being precisely where they are, and consumer governments continue to send the message that while they do not like the level, they very much like the lack of momentum," Barclays Capital said in a note.
Analysts and traders said the possibility of a further release from emergency stocks could cap gains over the medium term, although on Thursday, the fourth named storm of the Atlantic hurricane season provided limited support.
The U.S. government's weather agency has forecast an "above normal" 2011 Atlantic hurricane season, spawning six to 10 hurricanes of which around half could become major.
At the same time, any weakening of the U.S. dollar connected to the economy or attempts to stimulate it could also drive up the range of dollar-denominated commodities, made cheaper for holders of other currencies.
Potentially adding to U.S. problems, Tropical Storm Don was heading toward the Texas coast and potentially threatening oil infrastructure in the U.S. Gulf of Mexico.
The IEA linked its reserves release to supply disruption because of civil war in Libya, although it has also cited concern about economic weakness.
It said it would continue to monitor the supply/demand balance and analysts say the market is factoring in the possibility of further emergency action.
"If economic growth continues to disappoint, further intervention of this sort cannot be ruled out. Other things been equal this potentially limits the extent to which oil prices can rise aggressively from here," said Richard Batty, global investment strategist at Standard Life Investments.
He estimated $15 of the oil price reflected a risk premium because of tension in the Middle East and North Africa and a further $10 reflected the fall in the trade-weighted U.S. dollar. .DXY
(Additional reporting by Florence Tan in Singapore and Christopher Johnson in London; editing by William Hardy)
