Nasa / Reuters
Hurricane Isaac is seen churning in the Gulf of Mexico after making landfall on the Louisiana coast in this NASA handout satellite image taken on Aug. 28, 2012. Isaac did very little damage so far to Gulf oil facilities.
Updated 11:09 a.m. EDT: Brent crude oil slipped towards $112 on Wednesday as Hurricane Isaac left U.S. Gulf Coast oil production largely untouched and as government figures showed an unexpected rise in U.S. crude inventories.
A declaration by major Western economies that they were ready to release oil reserves to curb high prices and prevent them damaging growth also helped dampen the market.
Brent crude for October fell more than $1 per barrel to a low of $111.50 before recovering to around $112.50 by 1450 GMT. U.S. crude was down $1 at $96.33.
U.S. crude oil stockpiles rose 3.78 million barrels to 364.52 million in the week to August 24, overturning analysts' forecasts of a draw of 1.5 million barrels, the U.S. Energy Information Administration said on Wednesday.
Distillate stocks rose 873,000 barrels to 126.08 million, also confounding a forecast of a 0.1 million barrel draw.
The data partly confirmed a report by the American Petroleum Institute, which reported on Tuesday that U.S. crude stocks rose 5.5 million barrels last week.
Analysts said the market was relieved that Isaac had not caused any significant damage to oil facilities.
"It is expected that oil production in the Gulf of Mexico will quickly return to normal," said Carsten Fritsch, an oil analyst at Commerzbank in Frankfurt.
U.S. energy companies shut many facilities in the Gulf of Mexico, as a precautionary measure. The U.S. Department of Energy estimated about 12 percent of oil refining capacity had come offline on the Gulf Coast.
But Isaac, which hit Louisiana, driving water over the top of a levee on the outskirts of New Orleans, skirted major energy installations in the Gulf of Mexico.
Worries about supply disruptions resulting from Isaac on Monday pushed Brent to a high of $115.50 per barrel, while NYMEX futures hit a peak of $97.72. Brent has risen around 7 percent so far this month while U.S. oil has gained 9 percent, its biggest monthly rise since October 2011.
Isaac has brought high winds and soaking rains to southern U.S. states, posing the first test for multi-billion-dollar flood defences put in place in New Orleans after Hurricane Katrina devastated the U.S. Gulf Coast seven years ago.
Also putting a dampener on oil prices was a statement by finance ministers of the Group of Seven most industrialized nations (G7) on Tuesday that the West was ready to tap strategic oil reserves to dampen oil prices that could hit global growth.
"We stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied," the G7 said.
"The current rise in oil prices reflects geopolitical concerns and certain supply disruptions. We encourage oil-producing countries to increase their output to meet demand."
The White House has been considering a release of strategic reserves for some weeks but such a move would be controversial.
The head of the International Energy Agency has voiced strong opposition to any use of emergency oil stocks unless there is a supply shortage.
Clues as to whether the U.S. Federal Reserve is leaning towards more stimulus are expected from Chairman Ben Bernanke in a speech on Friday at an annual meeting at Jackson Hole, Wyoming. Bernanke has used the event in the last two years to indicate the Fed's policy intentions.
A poll of 61 economists gave a 45 percent chance of the Fed announcing a third round of quantitative easing, or QE3, after its policy meeting on September 12-13.
Walter de Wet, commodities analyst at South Africa's Standard Bank, said oil should be one of the main beneficiaries of any additional QE: "Any indication of the U.S. Fed signaling this Friday (that) they will provide more monetary stimulus should keep the market supported."
CNBC's Brian Shactman reports on how the shutdown of nearly all oil production in the Gulf is impacting oil prices.