Brent drops below $109 on US demand concerns, but storm limits losses
* Tropical Storm Karen shuts production in Gulf of Mexico
* Storm expected to reach hurricane strength on Friday
* Easing in Iran tensions weighs on oil
SINGAPORE, Oct 4 (Reuters) - Brent futures fell below $109 a barrel on Friday on concerns that a prolonged U.S. government shutdown would hurt oil demand, but losses were limited as a storm in the Gulf of Mexico curbed supply.
Oil followed most other commodities lower as the U.S. government shutdown stretched to a third day, with concern brewing over another fiscal crisis set to hit Washington in about two weeks.
Congress must increase the country's borrowing limit on Oct. 17 or risk default, a situation many fear would be far worse than the shutdown arising from a budget standoff.
Brent crude had slipped 9 cents to $108.91 by 0351 GMT, after settling 19 cents lower. U.S. oil fell 12 cents to $103.19, after ending down 79 cents.
"The U.S. budget crisis is creating fear among investors," said Chee Tat Tan, investment analyst at Phillips Futures in Singapore.
The budget crisis is expected to hurt demand in the world's biggest oil consumer, as nearly a million government workers are home without pay and general consumer confidence weakens.
"In addition, the upcoming debt ceiling negotiations are causing very negative market sentiment, because if manufacturing starts to drop, then demand for oil will stay unsupported," Tan said.
Despite settling lower, both benchmarks traded at one-week highs in the previous session as energy companies in the Gulf of Mexico started shutting in production and were evacuated some workers as Tropical Storm Karen headed towards a crucial part of the basin.
The National Hurricane Center said the storm was expected to be at or near hurricane strength on Friday, and that it was expected to reach the U.S. Gulf Coast between Louisiana and the Florida Panhandle over the weekend.
The Gulf of Mexico provides nearly a fifth of daily U.S. oil output.
A weakening greenback is also supporting prices, as importing nations find it cheaper to buy dollar-priced oil using their own currency. The dollar languished near an eight-month low on Friday against a basket of major currencies.
But a further easing of tensions between Iran and the West over the Middle East country's nuclear programme dragged on prices. The United States on Thursday held out the possibility of giving Iran some short-term sanctions relief in return for concrete steps to slow uranium enrichment and shed light on its nuclear programme.
"The lifting of sanctions is not going to happen any time soon. The U.S. is facing its own internal problems and doesn't have much time to look at the Iran issue at the moment," said Tan at Phillips Futures.
The U.S. employment report, a key gauge to the Federal Reserve's next stimulus strategy, is unlikely to be released on Friday because of the U.S. shutdown.
(Editing by Joseph Radford)