Oil prices fell on Wednesday as data showed the first release of crude from the US petroleum reserve unexpectedly pushed up domestic inventories last week, adding to concerns over weak economic data. US 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 co-ordinated move by members of the International Energy Agency announced in late June to cover supply losses due to the conflict in Libya.
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. Further pressure came as data showed new orders for long-lasting US 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. US crude weakened further against Brent oil, sending the premium of Brent to US futures to above $20 a barrel after ending below $19 on Tuesday, in spread trading, traders said.
US 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 pm EDT (1850 GMT), US 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. The market eyed the development of a potential tropical cyclone in the Gulf of Mexico, home to 29 percent of US oil production, which could impact supplies.
As a precaution, Royal Dutch Shell pulled support personnel in its area platforms while other companies monitored the development. No production had been shut in. Near the close, the US 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.
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 Jason Schenker, president and chief economist of Prestige Economics LLC in Austin, Texas.