Oil prices fell below $97 a barrel Friday as U.S. leaders failed to agree to lift the government debt limit just days from a deadline, leaving investors to consider worst-case scenarios if a default occurs.

By early afternoon in Europe, benchmark oil for September delivery was down 78 cents to $96.66 a barrel in electronic trading on the New York Mercantile Exchange. Crude rose 4 cents to settle at $97.44 on Thursday.

In London, Brent crude fell 39 cents to $116.97 per barrel on the ICE Futures exchange.

Investors are closely watching negotiations among U.S. lawmakers ahead of Aug. 2, when the government will run out of money to pay its obligations unless its $14.3 trillion debt limit is raised.

Most analysts say a U.S. debt default is still very unlikely, but if it happened would devastate the economy. Credit Suisse estimated Thursday that a default would likely trigger a 5 percent contraction of U.S. gross domestic product.

Crude has traded near $97 for the last few days as investors wait for an outcome of the debt limit talks.

"Crude prices are generally in a holding pattern ahead of further guidance regarding the debt ceiling agreement or lack thereof," energy consultant Ritterbusch and Associates said. "A difficult trading environment still lies ahead until the U.S. debt situation acquires some clarity."

For commodity analyst Edward Meir of MF Global, there had not yet been a "decisive move" either up or down in commodities early Friday.

"However, we suspect that the overall tone will get progressively 'sellerish' ... and pick up even downward speed if the standoff continues into Monday," Meir said.

Oil prices were supported by the effects of Tropical Storm Don in the Gulf of Mexico, which led to the temporary closure of 11 offshore oil rigs. The storm is expected to make landfall Friday in southeastern Texas.

About 6.8 percent of normal Gulf oil production — or nearly 95,000 barrels — was cut off, along with 2.8 percent of normal natural gas output after personnel evacuations, the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement said.

"Assuming that production is not impaired for any length of time, we envisage prices subsequently coming under pressure," said a report from Commerzbank in Frankfurt. "There is, after all, no shortage of oil at present."

Investors will also be eyeing U.S. GDP growth for the second quarter which is scheduled to be announced later Friday.

Some analysts expect that once the U.S. debt issue is settled, investors will focus on strong crude demand in developing countries, particularly China, and push oil prices higher by the end of the year.

"Hard though it may be to see through the currently negative headlines, there is the potential for a positive economic outcome, particularly for oil," J.P. Morgan said in a report. "The removal of policy uncertainty offers a constructive sign for the fourth quarter."

In other Nymex trading in September contracts, heating oil fell 0.85 cent to $3.1059 a gallon while gasoline slipped 0.66 cent to $3.0572 a gallon. Natural gas futures dropped 5.6 cents to $4.188 per 1,000 cubic feet.