Brent crude steadied at over US$110 per barrel on Wednesday, not far from a one-week low hit in the previous session, as investors nervously eyed talks to head off a looming fiscal disaster in the United States, the world's top oil consumer.
Supply worries due to tension in Egypt, however, cushioned prices that were locked in a tight range - swinging from a drop of 10 cents to a rise of 9 cents so far in the session.
Brent crude was up 23 cents at US$110.10 per barrel by 0452 GMT, after dropping to US$109.31 on Tuesday - its lowest since November 20. US crude was up 4 cents at US$87.22 per barrel.
Concern over whether US lawmakers were putting the world's largest economy at risk of a recession by failing to make headway in their budget talks are weighing on financial markets, analysts said.
"The global economy, China, Europe, needs the US economy to grow, and that is why the pressure to get this deal done is greater than before," said Carl Larry, a derivatives broker at the Houston-based Atlas Commodities. "The global economy can't afford for America to slip back into a recession."
The US Congress pushed toward a compromise on Tuesday on a deal to avert the "fiscal cliff" of tax increases and spending cuts due to take effect next year, but an agreement still appeared elusive.
"The rhetoric emanating from Washington in recent days has not exactly filled traders with an abundance of confidence that a deal will get done comfortably before the deadline," said Tim Waterer, sales trader with CMC Markets.
"Investors had feared that the discussions between Republicans and Democrats would be a long drawn out process and this is exactly what appears to be playing out on Capitol Hill."
Further depressing the outlook for oil demand, the Organisation for Economic Cooperation and Development cut its global growth forecasts, warning that the debt crisis in the recession-riddled euro zone was the greatest threat to the world economy.
"Another reason why we are seeing some swing in prices is because trading volumes are looking light, we aren't quite back to levels prior to the holidays," Larry said.
The escalating political crisis in Egypt that has triggered worries about potential disruption to supplies in the Middle East, however, continued to prop up oil prices.
Tens of thousands of Egyptians rallied on Tuesday against President Mohamed Mursi in one of the biggest outpourings of protest since Hosni Mubarak's overthrow, accusing the Islamist leader of seeking to impose a new era of autocracy.
"When you see the protests on the streets in Greece the markets drop, but when you see the thousands of people gather in the streets of Egypt, the markets get nervous and jump," Larry said. "Protests in Egypt and tensions in the Middle East send prices upwards and make it even more difficult for the global economy to sustain a recovery."
Investors are now eyeing data on US crude stockpiles from the US Energy Information Administration later in the day for hints on demand from the key consumer.
Data released by the American Petroleum Institute late Tuesday showed crude stocks rose by 2m barrels for the week ended November 23. Gasoline stocks rose 2.3m barrels and distillate stocks rose 268,000 barrels, the API said.
Crude stocks were expected to be up only 300,000 barrels and gasoline up 900,000 barrels, a Reuters survey showed.
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