Brent crude slipped toward US$110 per barrel on Tuesday as demand concerns moved into focus after weak manufacturing data from the United States, the world's top oil consumer, while its uncertain fiscal deficit negotiations also kept investors on the edge.
But supply worries stemming from simmering tensions in the Middle East including a fragile ceasefire between Israel and Palestine and worsening unrest in Syria helped cushion prices.
"Oil markets are starting to come off on the weaker-than-expected manufacturing data and the fact that the US economic outlook remains unclear," said Natalie Rampono, commodity strategist at ANZ in Sydney.
"We are also seeing mixed headlines on the 'fiscal cliff' negotiations, so markets have already taken on a cautious outlook on that account."
Front-month Brent futures slipped 43 cents by 0527 GMT to US$110.49, after breaking through a key resistance level to close below its 200-day moving average of above US$111 in the previous session.
US crude slipped 48 cents to US$88.61 per barrel. Following its inability break above resistance at US$90.30, the contract will probably head into a US$87.19-US$87.93 range, according to Wang Tao, Reuters market analyst, commodities and energy technicals.
Other markets, such as Asian shares, base metals and bullion, also slipped after the bleak US data.
Investors have been fretting about the fiscal health of the world's biggest economy, especially given the ongoing weakness in the crisis-ridden euro zone.
Concerns increased after the Institute for Supply Management (ISM) said on Monday that its index of national factory activity fell to its lowest since July 2009 on uncertainties over the US budget negotiations and the aftermath of Hurricane Sandy that hit the US east coast last month.
"It appears that this month's weakness was caused by fiscal cliff worries rather than reduced production from the aftermath of Hurricane Sandy," analysts at Bank of America Merrill Lynch said in a report.
"Fiscal cliff concerns are likely to persist for several more weeks," they said, adding that the reading for December is also expected to be weak
The US data outweighed the positive impact from Chinese manufacturing data earlier on Monday that reaffirmed the view growth was picking up in the world's biggest energy consumer.
Adding to jitters is the increasing uncertainty on negotiations to avert a "fiscal cliff", a $600 billion package of spending cuts and tax increases effective early 2013 that threatens to tip the economy back into recession.
The White House dismissed a proposal from congressional Republicans on Monday that included tax reforms and spending cuts, saying it did not meet President Barack Obama's pledge to raise taxes on the wealthiest Americans.
Incessant tensions in the Middle East and related worries about the impact on oil supplies from the region continue to support prices.
The biggest concern at the moment is that the fragile ceasefire between Israel and Palestine may be at risk after Israel said it will continue to expand its settlements in West Bank and East Jerusalem.
An escalation of a 20-month old civil conflict in Syria, which worsened after the government spokesman fled the country and the United Nations decided to withdraw its non-essential staff, added to fears of supply disruptions.
Investors are also awaiting inventory data from the American Petroleum Institute (API) due later on Tuesday. Crude stocks are expected to have risen by 100,000 barrels in the week ended Nov 30, a preliminary Reuters poll showed.