Oil drops as US stockpiles swell, Europe woes persist

Oil fell back for the third day in four on Wednesday as an unexpected rise in U.S. crude stockpiles extended losses and deepened demand worries already turning bleak with the growing euro zone crisis.

U.S. crude oil inventories rose 2.7 million barrels last week on sharply higher imports, defying forecasts for a modest drawdown, data from the U.S. Energy Information Administration showed.

Gasoline and distillate stockpiles also rose sharply and put further pressure on crude futures.

Gasoline stocks jumped 4.1 million barrels, going against the forecast for a small withdrawal, as four-week average demand was down 3.2 percent from year-ago levels, the EIA report showed.

"These are some pretty stout numbers," said Carl Larry, president of Oil Outlooks LLC in New York. "We saw stocks rise not only on higher production runs, but product imports nearly doubled in gasoline," he added.

In London, September Brent crude was off 68 cents at $102.74 a barrel by 12 noon EDT (1600 GMT), after posting a session low of $102.10 after the EIA data was released.

U.S. September crude was down $1.29 at $87.21 after sliding to a session low of $86.84.

U.S. August RBOB gasoline slumped 8.24 cents to $2.7424 a gallon, after falling below its 50-day average of $2.7613 and dropping to a two-week low $2.7298 in the wake of the EIA report.

Oil futures were essentially near flat before the EIA data was released.

In earlier trading, weak economic data from Europe helped pull prices nearly 1 percent below Tuesday's close.

The euro zone's private sector shrank for a sixth month in July as manufacturing output nosedived, notably in the core countries of Germany and France, adding to fears the bloc will slump back into recession.

German business sentiment dropped for the third month in a row in July to the lowest in 28 months, in a sign that a renewed flare-up of the euro zone sovereign debt crisis is weighing on business in Europe's largest economy.

British economic output also shrank much more than expected in the second quarter hit by the euro zone debt crisis and government austerity, official data showed.

Graphic-24 hour Brent analysis: http://link.reuters.com/wuf69s

Graphic-24-hour WTI analysis: http://link.reuters.com/vuf69s

Graphic on China's PMI: http://link.reuters.com/kuf29s

Euro zone debt crisis: http://r.reuters.com/hyb65p

An improvement in China's manufacturing sector in July propped up prices in early trading, but reports that the economy of the world's second biggest oil consumer was still weakening kept investors cautious.

The International Monetary Fund said China's economy is set for a soft landing and urged further reform and currency appreciation to rebalance growth and reduce risks.