NEW YORK (Reuters) - Oil prices fell almost 4% to their lowest in over two months on a smaller-than-expected decline in U.S. crude inventories and fears of a global economic slowdown due to the U.S.-China trade war.

FILE PHOTO: Pump jacks operate at sunset in an oilfield in Midland, Texas U.S. August 22, 2018. REUTERS/Nick Oxford

The Energy Information Administration (EIA) said U.S. crude stockpiles fell nearly 300,000 barrels last week, less than the 900,000-barrel decline analysts forecast in a Reuters poll and well below the 5.3 million-barrel drawdown the American Petroleum Institute (API) reported late Wednesday.

The decline last week reduced crude stocks from their highest since July 2017 seen the previous week, but at 476.5 million barrels, they were still about 5% above the five-year average for this time of year.

“The oil inventories report has added to the bearish sentiment prevailing in today’s trading session,” said Abhishek Kumar, head of analytics at Interfax Energy in London, noting “Demand-side concerns emerging from the ongoing U.S.-China trade war are expected to remain the key driver weighing on oil prices.”

Brent futures fell $2.58, or 3.7%, to settle at $66.87 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $2.22, or 3.8%, to close at $56.59.

Those were the lowest closes for Brent since March 12 and WTI since March 8.

For the month, Brent is on track to fall about 8% and WTI around 11%, which would be the first monthly decline for both contracts in five months.

The premium of Brent over WTI , meanwhile, fell to around $10 per barrel, down from a more than four-year high of $11.59 on Wednesday.

“An escalating U.S.-China trade war represents a risk to oil markets,” Bernstein Energy said in a note.

A senior Chinese diplomat compared trade actions from Washington to “naked economic terrorism.”

Bernstein Energy said under “a full-blown trade war scenario,” global oil demand would grow by just 0.7% this year, half of current estimates.

Because of weakening demand, Bernstein said any upside for oil markets was capped despite relatively tight supply.

Oil prices have been supported this year by output cuts from the Organization of the Petroleum Exporting Countries and other major producers, as well as by falling supplies from OPEC members Iran and Venezuela due to U.S. sanctions.

Iranian May crude exports dropped to less than half of April levels at around 400,000 barrels per day (bpd) after the United States tightened sanctions on Tehran’s main source of income. Iran needs to export at least 1.5-2.0 million bpd of crude to balance its books.

“We see an abundance of escalation risks in large part because the U.S. sanctions are subjecting Iran to almost unprecedented economic pain,” said Helima Croft, managing director of RBC Capital Markets.

Arab leaders gather in Saudi Arabia on Thursday for emergency summits that Riyadh hopes will deliver a strong message to Iran that regional powers will defend their interests against any threat following attacks on Gulf oil assets this month.

As Arab leaders gathered in Saudi Arabia, the U.S. Iran envoy said the United States will respond with military force if its interests are attacked by Iran.

Many analysts also expect OPEC-led supply cuts to be extended until the end of 2019 as the group wants to prevent oil prices from falling back to levels seen in late 2018 when Brent slumped to $50 per barrel.

Since OPEC and its allies started withholding supply in January, oil prices have risen by about 30%.

(GRAPHIC: Iran crude oil shipments link: tmsnrt.rs/2WabNSp).