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LONDON -Oil prices erased earlier gains on Thursday during U.S. trading hours as a political standoff about the U.S. debt ceiling overshadowed a G7 finance leaders' meeting, raising jitters about a possible recession in the world's biggest oil consumer.

Brent crude was down 27 cents, or 0.4%, to $76.14 a barrel at 1200 GMT, while U.S. crude futures dipped 29 cents, or 0.4%, to $72.27. Both contracts are still on track for their first weekly percentage gain in four.

The Bank of England raised its key interest rate by a quarter of a percentage point, taking UK borrowing costs to their highest since 2008 with its 12th consecutive rate rise, as it seeks to curb the fastest inflation of any major economy.

On Wednesday, U.S. data showed a key inflation measure monitored by the Federal Reserve eased somewhat, potentially providing cover for the central bank to pause further increases to interest rates next month. Higher rates can weigh on oil demand.

Government data on Wednesday showed U.S. gasoline and diesel inventories fell last week, reflecting stronger demand for transport fuels, while crude oil stockpiles rose unexpectedly on the back of a national reserves release and lower exports. [EIA/S]

Meanwhile, investors are also awaiting news from talks on raising the U.S. government's $31.4 trillion debt ceiling, which kicked off on Wednesday, with Republicans continuing to insist on spending cuts.

The standoff sent the cost of insuring exposure to U.S. government debt to record highs as Wall Street grows more concerned about the risk of an unprecedented default. [MKTS/GLOB]

"Once a compromise is reached ... investors will be encouraged to act and stocks will probably rally, providing invaluable support for oil," said PVM analyst Tamas Varga.