Oil dropped on Wednesday, after a surprise gain in US crude inventories and the downgrade of Ireland's credit rating reinforced views of a well-supplied market and a deteriorating demand outlook.

China's implied oil demand in June rose 1.1 per cent from a year earlier, the slowest growth rate since April 2009, according to Reuters calculations based on preliminary government data released on Wednesday.

Brent for August fell 40 cents to $117.35 a barrel at 0358 GMT, while US crude shed 23 cents to $97.20.

US stockpiles of distillates including heating oil and diesel posted a larger-than-expected increase last week, the American Petroleum Institute (API) said late on Tuesday, while Europe's debt crisis is prompting forecasters to trim their predictions for demand growth.

'The oil supply-demand balance is not really tight,' said Tetsu Emori, a fund manager at Tokyo-based Astmax.

'But in the current market, people are too pessimistic, looking at the weakness in the US economy and the European debt crisis. I am quite confident that the soft patch in the economy should be over in a few months, with support for Brent at $110.'

Annual gross domestic product growth in China, the world's second-largest oil user, eased to 9.5 in the second quarter from 9.7 per cent in the first, the National Bureau of Statistics said, but the growth rate was stronger than market expectations of 9.4 per cent.

Crude inventories in top consumer the United States rose 2.3 million barrels last week, the API said, compared to expectations for a decline of 1.8 million.

Distillates climbed 4.8 million barrels, 12 times as much as forecast, while gasoline stocks unexpectedly fell by 1.6 million barrels. Government statistics from the Energy Information Administration will follow on Wednesday at 1430 GMT.

A report from MasterCard showed US gasoline demand for the July 4 holiday dropped to the lowest level since 2007 as Americans cut back on driving due to high pump prices.

Still, US crude on Tuesday posted stronger gains than Brent, narrowing the spread between the contracts to below $21 a barrel. The previous session, Brent's premium had pushed to within pennies of its June 15 record of $23.34.

Consumption growth to slow?

A deepening European debt crisis and slowing economic growth in China are prompting reductions in forecasts for growth in global oil consumption.

Demand will grow less than previously forecast this year and in 2012 due to a more moderate economic recovery and higher fuel prices, the top US energy forecasting agency said on Tuesday.

In its new monthly outlook, the EIA cut its forecast for 2011 world oil demand growth by 270,000 barrels per day (bpd) to a 1.43 million-bpd increase this year. Oil demand in 2012 will rise 1.58 million bpd, about 10,000 bpd lower than the agency forecast last month.

The forecast came after OPEC also said that world oil demand would grow more slowly in 2012 because of a fragile global economy and deepening decline in consumption in Europe.

Fears of escalating euro zone sovereign debt crisis heightened on Tuesday, after Moody's cut Ireland's credit rating to junk and warned the country might need a second bailout.

European Union leaders are poised to hold an emergency summit after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts and to stop contagion spreading to Italy and Spain.

The Organisation of the Petroleum Exporting Countries (Opec) predicted world oil consumption would rise by 1.32 million bpd in 2012, slightly lower than the growth of 1.36 million bpd expected this year.

Royal Dutch Shell said on Tuesday it had lifted a force majeure on its Nigerian Bonny Light crude oil loadings which was declared on June 13 due to leaks and fires on its Trans-Niger Pipeline.

In other markets, Asian stocks, metals, and the Australian dollar jumped on Wednesday after the Chinese GDP data soothed some worries over a global slowdown at a time when euro zone debt concerns are also deterring investors. – Reuters