Oil Prices Slump on U.S. Demand Concerns

West Texas Intermediate light sweet crude oil for September delivery was falling $1.06 to $98.53 and the September Brent crude contract was sliding 73 cents to $117.55 as the debate between Democrat and Republican lawmakersover raising the U.S. debt ceiling continues.

President Barack Obama, in a televised address late Monday, said a breakdown in talks over raising the country's $14.3 trillion borrowing limit could seriously hurt the U.S. economy. The deadline for reaching a deal to raise the country's debt ceiling is Aug. 2.

"These prices reflect concerns that the conflict over how to handle the U.S. debt limit and the threat of a de facto bankruptcy could hit demand in the world's biggest oil consuming country, the U.S.," said Commerzbank commodity research analyst Carsten Fritsch of the lower oil futures prices.

JBC Energy Research Center analysts think there's a strong possibility that ratings agencies will downgrade the U.S. credit rating from AAA to AA.

"We think this is going to happen, reflecting not only the relatively dire state of the U.S. economy but also the inability of the political system to cope with the current situation in a responsible manner," said JBC analysts, who added that the rapid decline of the dollar suggests the broader market shares these expectations.

Fritsch notes that oil is no longer benefiting from any further slide in the U.S. dollar at this point.

Also weighing on WTI prices Wednesday was the American Petroleum Institute's report on Tuesday showing a surprising increase in U.S. crude stocks of almost 4 million barrels last week.

"The main reason for this was a surge in crude imports, and refinery utilization was also somewhat lower," said Fritsch. "There is no shortage of oil at the moment, so prices are open to correction once the effect of the weaker U.S. dollar has faded."

At 10:30 am, the Department of Energy publishes its weekly oil inventory report; analysts expect the DOE will report an increase in inventory levels for the first time in nine weeks.

Natural gas futures for September delivery were edging 3 cents higher to $4.365 per million British thermal units on the possibility of a tropical storm formation passing through the Yucatan channel, bound for the Gulf of Mexico -- a major area of natural gas production and reserves.

According to Matt Smith, energy analyst at Summit Energy, there is an 80% chance of this happening.

"This is not concerning prices too much at this early stage, providing a minor bullish influence, as is weather, with continuing temperatures above the norm across much of the U.S., both now and for the next couple of weeks."

Smith says there are some bouts of excessive heat expected over the next few days, but nothing that will lead to a strong rally, given the supply U.S. natural gas glut.

Oil and gas stocks were mostly heading lower in premarket trading Wednesday. Marathon Oil(MRO_) was falling 1% to $32. Chevron(CVX_) was lower by 0.5% to $106.99,BP(BP_) was falling 1.1% to $45.67, Royal Dutch Shell(RDS.A_) was falling 0.7% to $74.62, Occidental Petroleum(OXY_) was down 0.4% to $104.43, Chesapeake Energy(CHK_) was down 0.6% to $33.90 and Petrohawk Energy(HK_) was flat at $38.32.