Brent slips below $109 as U.S. shutdown drags on, stocks build

By Manash Goswami

SINGAPORE (Reuters) - Brent futures slipped below $109 a barrel on Thursday, after posting their biggest gain in two weeks in the previous session, on worries a prolonged U.S. government shutdown would hurt demand in the world's biggest oil consumer.

President Barack Obama met with Republican and Democratic leaders in Congress to try to break a budget deadlock that has shut wide swaths of the federal government, but after more than an hour of talks there was no breakthrough. Oil was also under pressure from a surprise surge in U.S. crude stockpiles.

Brent crude slipped 24 cents to $108.95 by 0444 GMT, after settling $1.25 higher. U.S. oil fell 36 cents to $103.74, after ending $2.06 higher.

"The upside potential for oil is quite limited, and the U.S. government shutdown is a negative factor and may hurt demand," said Tetsu Emori, a commodity sales manager at Astmax Investments in Tokyo. "The overall demand outlook is weak."

Crude surged overnight following news that TransCanada Corp's Keystone XL Gulf Coast pipeline would start up by the end of the year. The pipeline will ship crude from the Cushing, Oklahoma, delivery point of the U.S. oil futures to Nederland, Texas.

Emori expects oil futures to remain weak over the next few weeks, with Brent trading between $100 and $105 a barrel. Oil is however unlikely to slide much further below that range as that price level is preferred by most exporters, especially those in the Middle East, to support their budgets.

Oil at that level would also support production of shale oil in the United States that is helping the country reduce dependence on imports, Emori said.

Investors, for now, are focussing on the U.S. government shutdown and the impact on the dollar, which languished at eight-month lows early in Asia on Thursday. A weak dollar boosts commodities priced in the greenback.

WEAK SENTIMENT

Market sentiment however soured after data showed U.S. private employers added a fewer-than-expected 166,000 jobs in September, indicating steady but sluggish growth in the labour market.

"A combination of softer-than-expected U.S. labour market data and continued concerns that deliberations over the extension of the U.S. debt ceiling will be protracted weighed on risk sentiment overnight," analysts at ANZ said in a note.

The U.S. Congress must raise the debt limit in coming weeks or risk a default that could roil global markets.

Crude inventories in the United States rose sharply last week as refinery utilization fell, while the drawdown at Cushing, Oklahoma slowed.

Crude stockpiles increased by nearly 5.5 million barrels, data from the U.S. Energy Information Administration showed, against analysts' forecasts for a 2.3 million barrel rise. The U.S. Gulf Coast saw the biggest increase, up 3.8 million barrels, during the week to September 27.

Brent faces a resistance at $109.30 per barrel, while U.S. oil may retest a resistance at $104.08, according to Reuters technical analyst Wang Tao.

(Editing by Himani Sarkar)