By Nicole Jao

(Reuters) – Oil prices settled 1% lower on Wednesday due to a smaller-than-expected draw in U.S. crude stockpiles and ongoing concerns over Chinese demand. However, losses were capped by supply risks in the Middle East and Libya.

Brent crude futures settled down 90 cents, or 1.13%, at $78.65 a barrel. U.S. West Texas Intermediate crude futures fell $1.01, or 1.34%, to $74.52.

Prices lost more than 2% on Tuesday, following a 7% gain over the previous three days that saw Brent exceed $81 a barrel and WTI surpass $77.

U.S. crude inventories dropped by 846,000 barrels to 425.2 million barrels last week. This was less than the 2.3 million barrel draw that analysts expected according to a Reuters poll. Refining activity rose during the week.

Matt Smith, lead oil analyst at Kpler, noted, “It is a little surprising to see such a small crude draw if refinery runs were really that strong, at a six-week high.” He added, “Ongoing strength in imports and a tick lower in exports helped keep the draw in check.”

Concerns about demand in China continued to weigh on prices, with recent data indicating a struggling economy and slowing oil demand from refiners. Amarpreet Singh, an analyst at Barclays, commented, “Demand in China remains weak and the expected second-half rebound has yet to show credible signs of commencing.”

ONGOING SUPPLY RISKS

Potential loss of Libyan oil output and the possible escalation of the Israel-Gaza conflict involving Iranian-backed militants remained significant risks to oil markets, which limited price declines on Wednesday.

Several oilfields in Libya have halted output due to a dispute between rival government factions over control of the central bank and oil revenue, endangering about 1.2 million barrels per day (bpd) of production.

Giovanni Staunovo, an analyst at UBS, stated that these Libyan disruptions should tighten the oil market, but investors want to see a drop in Libyan crude exports first.

Fighting in the Gaza Strip between Israel and Hamas militants continues, with no signs of progress in ceasefire negotiations in Cairo. Furthermore, recent exchanges of fire occurred between Israel and Hezbollah across the Lebanese border over the weekend.

Geopolitical risks will keep world crude oil prices unstable, according to Tim Snyder, chief economist at Matador Economics.