* Obama, congressional leaders still deadlocked
* Reports of shots fired outside U.S. Capitol
* CFTC will not publish Friday COT report
* Tropical Storm Karen heads for U.S. Gulf Coast (Adds details on U.S. Capitol shooting. Updates to settlement prices.)
By Jeanine Prezioso
NEW YORK, Oct 3 U.S. oil settled lower on Thursday, despite the threat from a storm brewing in the oil-rich Gulf of Mexico, as investors worried the U.S. government shutdown could cut energy demand in the world's largest oil consumer.
Oil fell by more than one percent minutes after the market settled on reports that gunshots were fired outside the U.S. Capitol. The incident was later reported to be an "isolated event" and there was "no current threat to the Senate community," U.S. Capitol police said.
U.S. crude for November delivery settled 79 cents lower at $103.31 per barrel, after trading as high as $104.38. Prices dropped to a low of $102.88 after the market closed.
Brent oil settled 19 cents lower at $109 per barrel, after trading to a one-week high of $109.85.
Investors worried the shutdown could cut energy demand in the world's largest oil consumer. The U.S. budget crisis has closed federal agencies, cut into programs and sent nearly a million government workers home without pay. It has also weighed heavily on the oil market, said Mark Waggoner, president of Excel Futures in Bend, Oregon.
Traders have been "establishing new short positions," or bets that prices will fall further, he said.
"The market will go lower ultimately because your demand in the U.S. is starting to wane and the economy will slow down based on what's going on," Waggoner said.
The government shutdown prompted growing concern of wider economic consequences as it stretched into a third day with little sign of a political compromise.
The shutdown will prevent Friday's scheduled release of the U.S. Labor Department's monthly jobs report, a closely watched barometer on how the economy is faring. Also, the U.S. Commodity Futures Trading Commission will not publish its weekly Commitment of Traders report, which outlines open interest in commodity markets, due to the shutdown.
Prices rose earlier in the session as traders covered short positions ahead of Tropical Storm Karen, which formed in the Gulf of Mexico.
The storm forced producers to shut in some oil and gas production, and could become a hurricane by the weekend.
"Karen might cause some kind of shutdown at some (Gulf Coast) refineries because of flooding, which triggered some short-covering," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
Overall a storm would be "bearish" for the market as it would dampen oil demand, he added.
Offshore Gulf of Mexico accounts for about a fifth of total U.S. crude oil production.
Lower stock prices also weighed on oil prices, analysts said. Stocks also fell after reports of shots fired at the U.S. Capitol but then pared losses. (Editing by William Hardy, David Gregorio, Peter Galloway and Andre Grenon)