Oil falls as economic fears outweigh Mideast violence

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Oil prices fell on Thursday when an increase in U.S. weekly jobless data and disappointing earnings results stoked economic concerns, and the market focused on violence in the Middle East.

While most of the oil complex pushed lower in afternoon trading, front-month December Brent crude rose, bolstered by short-covering ahead of the contract's expiry later in the day.

Pressure came after the release of data that showed U.S. weekly jobless benefits claims rose last week, reflecting the impact of late October's superstorm Sandy, which also damped economic activity in the mid-Atlantic states.

Data showing the euro zone slipped into its second recession since 2009 in the third quarter also weighed down prices. Disappointing results from Wal-Mart Stores Inc and the looming U.S. "fiscal cliff" also pressured equity and oil markets.

Overall trading was choppy, however, with oil prices briefly pushing higher as violence between Israel and Hamas caught the attention of markets. Hamas fired dozens of rockets into southern Israel, killing three people, and Israel launched numerous air strikes across the Gaza Strip.

While events between Israel and the Palestinian territories do not directly threaten supplies, oil markets are sensitive to violence in the Middle East, which pumps a third of the world's oil. Traders worry that Arab producers could be drawn into the conflict, which might affect their supply lines.

"Until there is a clear sign that the instability in the region is spreading toward the oil-producing states, market participants are likely to approach this situation with caution and not over react to the upside," said Dominick Chirichella of New York's Energy Management Institute.

"That said, as long as the tensions and military activity continue to evolve, oil prices should find some price support in the short term."

The expiring December Brent contract settled up $1.37 at $110.98 a barrel, after stalling ahead of the 50-day moving average of $111.26 a barrel, in light trading. The more actively traded January Brent, which will becomes the front-month contract on Friday, dipped 47 cents to settle at $108.01 a barrel.

December U.S. crude oil futures fell 87 cents to settle at $85.45 a barrel.

The gains in front-month Brent pushed the contract's premium to December U.S. oil futures out to $26 a barrel during intraday trade, the highest since October 2011.

Oil traders have been balancing supply risks from the Middle East and export problems from the North Sea against ongoing worries about the impact of the struggling economy on global fuel demand.

"The market was trying to rebound from last week's four-month lows and, when we failed to attract any buying close to the $87 mark (for U.S. oil), the markets turned, and some of the new longs bailed," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

"Economic uncertainty continues to derail any efforts for the market to push higher."

News that Statoil had shut its Troll C oil and gas platform in the North Sea due to corrosion in a gas treatment system - cutting Norway's oil production by around 8 percent - added to mounting supply problems in the region, which has faced a series of export delays over the past month.

U.S. INVENTORIES

Closely watched weekly U.S. inventory data from the Energy Information Administration showed a build in crude oil stockpiles over the past week.

Gasoline and diesel inventories along the East Coast, which were struggling last week to recover from massive pipeline, barge and refinery disruptions caused by Hurricane Sandy, fell sharply.

Overall, U.S. distillate stockpiles fell by 2.54 million barrels, compared with forecasts for a 1.3 million barrel drawdown. Levels of the fuel in the Midwest decreased by 3.24 million barrels to the lowest level since November 2011.

Low inventories of distillates, which include diesel and heating oil, have stirred concerns about a shortfall heading into winter, especially in the giant Northeast market.

"The distillate draw is quite bullish in isolation. We are not in a good position heading into winter fuel season," said John Kilduff, a partner at Again Capital LLC in New York. (Reporting by Matthew Robinson and Robert Gibbons in New York; Alice Baghdjian in London; Manash Goswami in Singapore; Editing by Grant McCool,; Peter Galloway and Andre Grenon)



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