Brent hovers near $110 on US demand worries, Iran tension

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Brent crude was steady around $110 a barrel on Wednesday, nursing losses from the previous two sessions, as investors fretted over prospects for the US fiscal crisis to hurt oil demand, despite supply fears fanned by Middle East tension.

President Barack Obama and Republican lawmakers are locked in a battle over measures to avert the so-called "fiscal cliff", a program of spending cuts and tax increases that could push the world's top oil consumer back into recession.

Such a development would darken the outlook for oil demand, given subdued services data from China, weak US manufacturing data this week and the debt crisis in Europe.

"There are a lot of push-pull factors in the oil markets at the moment; with the fiscal crisis in the United States and the weak manufacturing data this week, there is certainly some negativity there," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

Front-month Brent futures traded 22 cents higher at $110.06 by 0444 GMT, after losing nearly 1 percent in the previous session. US crude added 46 cents to $88.91.

Brent prices could hover above a support level at $109.44 before dropping to $108.55, Reuters analyst Wang Tao said.

Still, political and civil unrest in Egypt and Syria and a running dispute between Iran and the United States threaten to disrupt exports from the Middle East, triggering worries about supply.

"Anything to do with the Middle East will underpin prices, but the big concern at the moment is the continuing tension with Iran," added Le Brun.

The biggest worry across asset classes remains the US fiscal negotiations and the current debate on taxes for the wealthy, proposed by President Obama and opposed by Republicans.

The political picture on Tuesday reflected a solid front of Democrats versus an increasingly shaky group of Republicans.

Any signs of uncertainty on the outcome of fiscal talks will increase market jitters as nearly $600 billion of spending cuts and higher taxes will take effect in 2013 if a deal isn't reached by the end of the year.

The absence of a fiscal deal could cut global oil demand by about 0.6 million barrels per day, JP Morgan analysts estimated in a report earlier in the week.

"Traders are now resigned to the fact that this will likely be resolved later rather than sooner, with the impasse in Washington likely to be a hindrance to upside market momentum for several weeks yet," Tim Waterer, a senior trader at CMC Markets in Sydney, said in a note.

The talks have switched investor focus from Europe, where an agreement between euro zone finance ministers and the International Monetary Fund to help Greece temporarily mitigated worries.

But with more of the region's countries on the brink of a crisis, the euro zone's troubles are far from over and the recurring worries will continues to drag down fuel demand.

Weak data from top consumers the United States and China added to investor worries.

Growth in China's services sector slowed in November, a survey of purchasing managers in the services industry showed.

US manufacturing unexpectedly contracted in November to its lowest level in more than three years.

Tension in the Middle East continued to support prices.

Iran, embroiled in a dispute with the United States over its nuclear program, said on Tuesday it had captured a US intelligence drone in its airspace, but the White House said there was no supporting evidence.

A political crisis in Egypt and a worsening civil conflict in Syria added to concern that oil supplies may be disrupted.

An inventory report showing a steep drop in crude stockpiles last week added to the support. Total US stockpiles dropped by 2.2 million barrels in the week to Nov. 30, beating analyst forecasts for a 300,000 barrel drawdown, data from the American Petroleum Institute showed on Tuesday.

The Energy Information Administration (EIA) will release its weekly data later on Wednesday.

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