Brent crude fell towards $109 a barrel on Friday after talks in the United States to reach an agreement to resolve a budget crisis stalled, reviving worries about demand in the world's biggest oil consumer.
Republican lawmakers failed to back an effort to head off $600 billion worth of indiscriminate tax hikes and spending cuts that threaten to push the US economy into recession next year. The dramatic twist, coming after growing optimism just a few days earlier of an agreement, weighed on Asian shares, the euro and base metals.
Brent crude slipped 57 cents to $109.63 a barrel by 8.39am UAE time, declining for a second day. The contract is set to rise for a second week. The stalemate had a larger impact on US oil, which fell as low as $88.93 and traded $1 lower at $89.13. It is set to rise nearly 3 percent this week.
"The latest news that came out just a few hours ago has caused the broader markets to sell," said Victor Shum, managing director at IHS Purvin & Gertz. "There's a view that it's a setback for talks between the Republicans and the White House."
Only 11 days are left to prevent automatic tax hikes and spending cuts, referred to as the fiscal cliff, and House of Representatives Speaker John Boehner faced an embarrassing setback when he failed to unite his lawmakers as many conservative Republicans are opposed to tax hikes on the richest wage-earning Americans.
A bullish target at $111.45 per barrel has been temporarily aborted for Brent as it was unable to break resistance at $110.50, while US oil is expected to hover around resistance at $90.30 or retrace moderately to $89, according to Reuters technical analyst Wang Tao.
But the overall outlook for oil demand growth looks set to improve for 2013 on the back of signs of a recovery in the US economy, said Ric Spooner, chief market analyst at CMC Markets.
The US economy grew faster than previously thought, at a 3.1 percent annual rate in the third quarter, the Commerce Department said. It was the fastest pace since late 2011 and more than double the second quarter's 1.3 percent rate.
Other data showed factory activity in the mid-Atlantic region picked up this month, while home resales in November were the best in three years, indicating the economy retained some vigor early in the fourth quarter.
"The numbers provide a sound spring board for an improved growth outlook for the United States in 2013," Spooner said.
Spooner expects Brent to trade between $100 and $120 a barrel next year and the US contract in a $80-$95 range.
A key factor pushing prices out of the range in the upper end is an escalation in the geopolitical crisis in the Middle East. Brent rose to a high of $128 a barrel and has stayed above $100 through most of the year on supply disruption worries as tensions over Iran's controversial nuclear programme escalated.
But an uncertain global economic outlook and Europe's long drawn out sovereign debt crisis have kept gains in check.
"Any increase in threat or physical damage to infrastructure will lead to spike in prices. Although we have surplus capacity, there isn't so much of a surplus to absorb a severe disruption," Spooner said. "The progress in resolving Europe's debt crisis will be a source of concern and weigh on the market."