NEW YORK (TheStreet) -- Oil prices were falling Thursday in the face of a possible U.S. debt default and Shell announcing that its Nigerian production levels have returned to normal levels.

The September Brent crude contract was falling 60 cents to $117.25 and West Texas Intermediate (WTI) light sweet crude oil for August delivery was down 20 cents to $97.85. The U.S. dollar was pushing higher against a basket of currencies, up 0.4% to $75.20, as the euro traded

sideways

on continued concerns about Italy, which saw a hike in borrowing costs despite strong demand at an auction of its long-term debt, according to a

Wall Street Journal

report.

Royal Dutch Shell

(RDS.A)

said Thursday that it has lifted its force majeure on exports of the high-grade Nigerian Bonny light crude effective July 1. Last month, Shell declared force majeure on its Nigerian Bonny Light crude oil loadings for June and July as production fell due to leaks and fires on the company's Trans Niger Pipeline in the Niger Delta. The leaks were blamed on sabotage by oil thieves and illegal refiners.

"Consequently, there is more light sweet crude supply on the market to compete with Brent, which should lead to a narrower Brent-WTI spread," said Canaccord Genuity energy research analysts.

The possibility of a U.S. debt default was weighing on the oil markets Thursday, as Democrats and Republicans had yet to reach a compromise on the debt ceilingl. Moody's on Wednesday said it has placed its Aaa U.S. bond rating on review for a possible downgrade given the rising possibility that the debt limit will not be raised in time, leading to a default on U.S. Treasury debt obligations. The government has until Aug. 2 to raise the debt ceiling.

"If the rating is lowered, it will cost billions more to borrow -- or more specifically, to repay -- money," Cameron Hanover analysts commented.

"While dollar weakness could boost oil prices ahead of a potential default, the event itself would likely be so disruptive that economic activity and oil demand would plummet, leading to lower oil prices," Canaccord Genuity energy research analysts added.

Promising economic data,

including a fall in initial jobless claims by 22,000 to 405,000 in the week ended July 9 and better-than-expected earnings from

JPMorgan Chase

(JPM) - Get Report

, provided a floor for the impact of worries about a U.S. debt default on oil prices Thursday, as did the possibility of another round of quantitative easing.

Ben Bernanke's comments during the beginning of a two-day testimony in Washington D.C. Wednesday pointed to the possibility of another round of quantitative easing, or QE3, if the U.S. economic recovery remained sluggish. The remarks about more potential stimulus was seen as somewhat more accommodative than some of the views expressed in the Federal Open Market Committee minutes Tuesday. Bernanke backed off those comments in further testimony today.

"We all know why this is bullish if it is implemented," Cameron Hanover analysts say. "But, even if it is not officially implemented, it will be a bullish factor. Its mere availability means that any economic news now is bullish. If the data is bullish, it's bullish. If it is bearish, it brings us one step closer to QE3."

"We went through this last September," say the analysts. Back then, the majority of the trading community expected QE2 to be announced at any time, and "every bearish piece of data was seen as a spur in the flank of the horse that was certain to bring quantitative easing's second round to official birth."

Another round of quantitative easing would send more so-called "easy money" into the markets and trigger outflows from safe-haven assets such as Treasurys -- that should in turn lead to riskier bets on commodities.

Cameron Hanover analysts say they have a neutral view on oil right now.

Natural gas for August delivery was falling 0.9% to $4.364 a million British thermal units after a bigger-than-expected weekly gain in U.S. stockpiles.

The Department of Energy reported a weekly increase of U.S. natural gas inventories by 84 billion cubic feet as of July 8 vs. the average analyst expectation of a 76 Bcf increase.

"The second consecutive larger-than-expected build in U.S. natural gas storage reinforces the idea that U.S. natural gas production has grown sufficiently to translate above normal temperatures into a near-average build in storage," said Citi futures perspective analyst Tim Evans.

He is still looking at a modest flow of below average storage injections, but warns that the market will be more vulnerable on the downside if temperatures moderate.

Shares of oil and gas companies were mostly trading higher.

ConocoPhillips

(COP) - Get Report

shares were popping by 4.2% to$77.55 after the oil giant said it plans to split into two publicly traded companies.

Shell

was rising 0.4% to $71.42,

Suncor Energy

(SU) - Get Report

was up 0.2% at $39.76,

Triangle Petroleum

(TPLM)

was up 1% at $6.86.

Integrated natural gas company

Williams

(WMB) - Get Report

says it has sweetened its bid for natural gas company

Southern Union Company

( SUG) to $44 a share in cash for a total enterprise value of $9.4 billion. Williams says this represents a 10% premium over the purchase price agreement between Southern Union and rival bidder

Energy Transfer Equity

(ETE)

and 56% premium over Southern Union's closing share price of $28.26 on June 15, the last trading day prior to the initial Energy Transfer acquisition announcement.

Williams shares were rising 1.7% to $29.27, Energy Transfer Equity shares were falling 1.3% to $44.21 and Southern Union shares were popping 4.6% to $43.50.

-- Written by Andrea Tse in New York.

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Andrea Tse

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