Brent crude edged down towards US$107 a barrel on Tuesday as a stalemate over fiscal talks in the United States and political uncertainty in Italy rattled investors, even as geopolitical tensions in the Middle East supported prices.
Investors shied away from riskier assets as US politicians squabbled over ways to reduce debt, while Italian Prime Minister Mario Monti's decision to resign early raised fears that the country could stray from economic reforms needed to steer itself out of the financial crisis.
Brent crude edged down 3 cents to US$107.30 a barrel by 0506 GMT. US crude was at US$85.63, up 7 cents.
"There is a bearish tone in the market going into the year end with nothing much to support oil prices except geopolitical risks," Tony Nunan, a risk manager at Mitsubishi Corp said,
"The focus is on the fiscal cliff," he said, adding that the bad news from Italy also weighed on oil prices.
More talks were held on Monday between the White House and House of Representatives Speaker John Boehner's office to break the "fiscal cliff" stalemate, although neither side showed any public signs that they were ready to give ground.
In Italy, borrowing costs soared and share prices tumbled on Monday as the markets took fright at Monti's announcement that he will step down early.
The news came just as the Organisation for Economic Co-operation and Development said on Monday that economic growth in Italy and China may be about to turn up.
China's crude imports rose in November while refinery runs reached a record of more than 10.1m bpd, although foreign trade data disappointed.
"Despite China's improving economy, prices could come under some pressure today as fresh uncertainty over Europe tempers sentiment," ANZ analysts wrote in a note.
Yet, tensions in the Middle East that threaten to disrupt oil supply have supported prices throughout the year. The region is facing fresh unrest in Egypt, fighting in Syria and global pressure on Iran to stop its nuclear programme.
"The geopolitical risk is higher than ever," Nunan said. "It's going to be nasty when Damascus falls."
Traders also will be keeping a close watch on any changes in OPEC supply as the group meets in Vienna on Wednesday, while scouring weekly US oil inventories data to be released over the next two days.
"The only thing that could come out of OPEC would be bearish as most people agree they have to address oversupply next year," Nunan said.
OPEC members collectively are producing about 1m barrels a day of crude more than needed, swelling oil stocks at a time of weak demand, Iranian OPEC governor Mohammad Ali Khatibi said.
The 12-member group is expected to stick with its target of 30m bpd when it meets on Wednesday.
In the United States, commercial crude oil stockpiles were forecast to have fallen last week amid high refinery demand, while gasoline inventories were expected to rise, a preliminary Reuters poll of five analysts showed.