Oil falls as inventories rise, debt talks falter

NEW YORK Wed Jul 27, 2011 3:42pm EDT

Pumps are seen at a gas station in Tokyo June 24, 2011. REUTERS/Kim Kyung-Hoon

Pumps are seen at a gas station in Tokyo June 24, 2011.

Credit: Reuters/Kim Kyung-Hoon

NEW YORK (Reuters) - Oil prices fell on Wednesday as data showed the first release of crude from the U.S. petroleum reserve unexpectedly pushed up domestic inventories last week, adding to concerns over weak economic data.

U.S. crude inventories rose 2.3 million barrels, boosted by the release of 2.268 million barrels of oil 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. <EIA/S>

Jitters over the higher stockpiles piled on top of fears about the unsettled debate on raising the U.S. debt ceiling before an August 2 deadline to avoid a disastrous default.

Further pressure came as data showed new orders for long-lasting U.S. manufactured goods fell unexpectedly in June, and a gauge of business spending plans slipped.

"(The 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.

U.S. crude weakened further against Brent oil, sending the premium of Brent to U.S. futures to above $20 a barrel after ending below $19 on Tuesday, in spread trading, traders said.

U.S. crude for September delivery fell $2.19, or 2.2 percent, to settle at $97.40 a barrel, having slid to a session low of $97.28.

In London, ICE September Brent settled at $117.43, down 85 cents, dropping from the day's high of $118.50.

Trading volumes were light, Reuters data showed. By 2:50 p.m. EDT (1850 GMT), U.S. volume was nearly 450,000 contracts, 26 percent below the 30-day average. Brent volume was around 368,000 contracts, 24 percent below the 30-day average.

GULF OF MEXICO STORM FEARS

The market eyed the development of a potential tropical cyclone in the Gulf of Mexico, home to 29 percent of U.S. oil production, which could impact supplies.

As a precaution, Royal Dutch Shell (RDSa.L) pulled support personnel in its area platforms while other companies monitored the development. No production had been shut in.

Near the close, the U.S. Federal Reserve, in its summary of conditions across the country, said economic growth slowed in much of the United States in June and early July, raising doubts of a pickup in activity in the second half of the year.

UNCERTAINTY 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 U.S. default on its debt, the effect on the oil markets will be bifurcated," said Jason Schenker, president and chief economist of Prestige Economics LLC in Austin, Texas.

"For WTI (U.S. crude), prices will fall on economic growth concerns. For Brent crude, which has a more global benchmark status than U.S. crude, it will get support from a lower dollar and continued global growth expectations," Schenker said.

Global stock markets fell as the United States edged toward default. Wall Street slid as anxiety grew over the debt debate in Washington and weak economic data stoked concerns about a further slowing of the economy. .N

The dollar was up 0.9 percent against a basket of currencies .DXY, rebounding as political wrangling over raising the U.S. debt ceiling continued. <USD/>

(Additional reporting by Robert Gibbons and David Sheppard in New York; Claire Milhench and Simon Falush in London; Editing by Dale Hudson)

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