UPDATE 8-Oil falls on U.S. government shutdown, despite storm
* Obama, congressional leaders still deadlocked
* CFTC will not publish Friday COT report
* Tropical Storm Karen heads for U.S. Gulf Coast
* U.S. dollar index hits fresh 8-month low
(Adds details on Tropical Storm Karen and CFTC. Updates prices. Adds quote)
NEW YORK, Oct 3 (Reuters) - U.S. oil fell on Thursday, despite some positive economic data in China and the threat from a storm brewing in the oil-rich Gulf of Mexico, as investors worried that the U.S. government shutdown could cut energy demand in the world's largest oil consumer.
The U.S. budget crisis has closed federal agencies, cut into programs, and sent nearly a million government workers home without pay. It has also weighed heavily on the oil market, said Mark Waggoner, president of Excel Futures in Bend, Oregon.
Traders have been "establishing new short positions," or bets that prices will fall further, he said.
"The market will go lower ultimately because your demand in the U.S. is starting to wane and the economy will slow down based on what's going on," Waggoner said.
On the third day of the U.S. government shutdown, Republicans and Democrats in Congress showed little sign of movement toward compromise, and concerns were growing about the economic consequences of a prolonged stalemate.
The shutdown will prevent Friday's scheduled release of the U.S. Labor Department's monthly jobs report, a closely watched barometer on how the economy is faring. Also, the U.S. Commodity Futures Trading Commission will not publish its weekly Commitment of Traders report, which outlines open interest in commodity markets, due to the shutdown.
Brent crude was 8 cents higher at $109.27 a barrel in choppy trade by 1:41 p.m. EDT (1741) GMT. But U.S. oil was trading 46 cents lower at $103.64 a barrel after ending the previous session with its largest daily percentage gain in two weeks.
Earlier in the session, U.S. crude hit a more than one-week high at $104.38 as traders covered short positions ahead of Tropical Storm Karen, which formed in the Gulf of Mexico.
The storm forced producers to shut in some oil and gas production, and could become a hurricane by the weekend.
"Karen might cause some kind of shutdown at some (Gulf Coast) refineries because of flooding, which triggered some short-covering," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. Overall a storm would be "bearish" for the market as it would dampen oil demand, he added.
Offshore Gulf of Mexico accounts for about a fifth of total U.S. crude oil production.
Lower stock prices also weighed on oil prices, analysts said. Stocks bounced off session lows but remained down after a report that House of Representatives Speaker John Boehner was determined to prevent a government debt default.
The U.S. dollar hit a fresh eight-month low against a basket of currencies at $79.627 and was last trading at $79.768, putting a floor under losses.
A weaker dollar is generally supportive of commodities priced in the greenback since it makes them more affordable to holders of other currencies.
(Editing by William Hardy, David Gregorio and Peter Galloway)