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Oil falls 1.6% despite big draw in crude inventories, Mideast tensions

A Petrobras oil platform floats in the Atlantic Ocean near Guanabara Bay in Rio de Janeiro.
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Oil prices fells on Wednesday, erasing earlier gains, despite the Energy Information Administration data showing a big draw in U.S. crude inventories.

Brent crude futures fell 50 cents to $63.33 a barrel, while U.S. West Texas Intermediate crude fell 89 cents at $55.88 a barrel.

U.S. crude failed to hold above $57.50 per barrel, a key technical level, before giving back its earlier gains, traders said.

Earlier in the session, the front-month Brent contract flipped to trade at a discount to the second-month contract, a market structure known as contango, for the first time since March. Sentiment in the oil market has darkened as investors worry about slowing global economic growth weakening demand for oil.

Yet the market was supported by a large drawdown in U.S. crude stockpiles earlier in the session. Crude inventories fell by 10.8 million barrels in the week to July 19, the Energy Information Administration said on Wednesday. Analysts expected a decrease of 4 million barrels.

"Hurricane Barry has shaken up the data for a second week, with lower production and stymied imports leading to a near-11 million barrel draw," said Matt Smith, director of commodity research at ClipperData.

U.S. oil companies cut some production in the Gulf of Mexico ahead of Hurricane Barry, which came ashore in Louisiana earlier this month.

Meanwhile, some geopolitical risk premium from tensions in the Middle East also helped buoy prices.

A U.S. Navy ship took defensive action against a second Iranian drone in the Strait of Hormuz last week, but did not see the drone go into the water, the U.S. military said on Tuesday.

Iran's president, Hassan Rouhani, said on Wednesday his country was ready for "just" negotiations but not if they meant surrender, without saying what talks he had in mind.

Also fueling tensions, Britain gained initial support from France, Italy and Denmark for its plan for a European-led naval mission to ensure safe shipping through the Strait of Hormuz following Iran's capture of a British-flagged tanker.

The military adviser to Iran's supreme leader was quoted on Wednesday as saying that any change in the status of the Strait of Hormuz, which Tehran says it protects, would open the door to a dangerous confrontation.