Oil lower as Syrian strike seen limited

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Brent crude oil settled lower on Wednesday, but with a less dramatic drop than U.S. oil, as it appeared a military strike against Syria would remain limited, quelling fears of supply disruptions in the Middle East.

The U.S. Senate Foreign Relations Committee on Wednesday passed a resolution authorizing military force in Syria.

Brent retained more of a supply risk premium than U.S. oil, which lost more than $1 per barrel, as any Middle East unrest could further tighten already strained global supplies. The U.S. market is somewhat shielded from global ructions by rising domestic oil supplies, some analysts said.

"The Brent market is where you will see a little more tightness if something happens in Syria," said Gene McGillian, analyst with Tradition Energy in Stamford, Connecticut. "There's a lot crude here (in the U.S.) and it's got to find a home."

U.S. President Barack Obama had asked U.S. lawmakers to approve his plan for a military strike against Syria for an alleged chemical weapons attack against its citizens.

While Syria is not a big oil producer, investors have been worried that a strike there by Western forces may spread unrest in the Middle East and disrupt supply from a region that pumps a third of the world's crude.

Markets are already coping with a supply loss from OPEC producer Libya as strikes at ports and pipelines have shrunk exports to around 80,000 barrels per day, less than a tenth of capacity.

As it stands now, outages from the Middle East and Africa have surpassed 3 million bpd, some 3.5 percent of global demand.

Front-month Brent crude oil futures settled 77 cents lower at $114.91, after trading as high as $116.09 and as low as $114.40.

U.S. crude oil for October delivery settled at $107.23 a barrel, $1.31 lower, or 1.2 percent, after trading between $106.77 and $108.61.

Last week, U.S. crude oil traded at its highest peak this year at $112.24. It then traded down to $104.21 earlier this week when military action against Syria was less certain.

Middle East tension may also widen Brent's premium to U.S. crude , which settled at $7.68 per barrel.

There are concerns that any action against Syria would have an ill effect on U.S. foreign relations with Iran and thwart diplomacy related to its nuclear program.

Other world leaders said a lack of action against the alleged use of chemical weapons may send the wrong message to Iran - that it would not face consequences for the proliferation of weapons of mass destruction.

The improving global economic outlook was having a secondary effect on prices, said Michael Lynch, an oil analyst and president of consultancy Strategic Energy & Economic Research Inc in Winchester, Massachusetts. "It's the reason we're not down $2 a barrel."

Euro zone businesses had their best month in more than two years in August, and growth in the services sector in China, the world's second-largest oil consumer, hit a five-month high.

A decline in crude oil purchases as seasonal refinery maintenance kicks off may place some downward pressure on prices in coming weeks, Lynch said.

Oil prices were little changed after the American Petroleum Institute reported U.S. crude oil stocks fell last week by more than analysts had expected in a Reuters poll. The API said crude inventories fell by 4.2 million barrels in the week to Aug. 30 to 362 million, compared with analysts' expectations for a decrease of 1.3 million barrels.

Crude oil stocks at the U.S. benchmark oil delivery hub in Cushing, Oklahoma, fell by 1.85 million barrels, API said.

The U.S. Energy Information Administration will report its closely watched oil inventory data on Thursday at 11 a.m. EDT (1500 GMT) . The EIA data will appear one day later than usual due to the U.S. Labor Day holiday on Monday. (Additional reporting by Peg Mackey in London and Florence Tan in Singapore; Editing by Keiron Henderson, James Jukwey, Lisa Von Ahn and Bob Burgdorfer)



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