Brent crude slipped on Thursday to trade near US$110 a barrel as investors took profits from recent gains after talks to avert a US fiscal crisis stalled, stoking worries about demand from the world's biggest oil consumer.
As a year-end deadline nears, US President Barack Obama and House of Representatives Speaker John Boehner remained locked in intense bargaining over a possible deal to avoid the so-called fiscal cliff of harsh tax hikes and automatic spending cuts that could badly damage an already weak economy.
Significant progress seemed to have been made earlier this week with both Obama and Boehner offering substantial concessions, but talks turned sour again with Obama accusing opponents of holding a personal grudge against him while the top Republican negotiator called the president "irrational".
"Negotiations are [not progressing] which is probably why we're seeing a sell-off today and the risk sentiment coming off," said Natalie Rampono, a commodities analyst at ANZ in Melbourne. "The markets are being directed by sentiment from the US fiscal cliff talks and so that will have the biggest influence on prices at the moment."
Brent crude slipped 35 cents to US$110.01 a barrel by 0340 GMT, after settling US$1.52 higher in the previous session which was the biggest one-day gain since November 19.
US oil fell 40 cents to US$89.58.
While investors still believe the United States will be able to avert a fiscal crisis, oil prices and other riskier assets will remain under pressure as the deadline comes closer with no signs of a deal yet.
However, a patch of promising data from Germany and the United States kept a floor under prices.
Morale at German businesses climbed in December as their confidence in the outlook rose at its fastest rate in 2-1/2 years, boosting hopes Europe's largest economy will bounce back quickly after a weak end to 2012.
Also adding to positive sentiment was data showing US homebuilding permits touched their highest level in nearly 4-1/2 years in November.
Investors are now eyeing weekly US data on jobless claims due later on Thursday for further clues on the country's economic health.
Oil prices also found early support from a drop in US crude oil and distillate stocks.
Crude stocks fell by 964,000 barrels to 371.65m barrels, compared with an average analyst forecast for a 1.1m barrel drawdown in a Reuters poll. Crude imports fell 101,000 barrels per day (bpd) to 8.36m bpd.
Distillates, which include diesel and heating oil, fell 1.09m barrels to 116.97m barrels, versus analyst expectations for a 1m-barrel build.
"Oil prices could get a little bit of support... in the slight pick up in heating oil demand with the drop in distillate inventory being greater than expectations... So if product prices increase, that could sometimes influence oil market sentiment," Rampono said.
Oil prices could also be underpinned by a little-noticed provision in US sanctions against Iran beginning in February that is likely to trap payments abroad for its oil exports running into billions of dollars.
The provision could halt most of the flow of petrodollars to Iran, given that the value of its oil exports is far higher than what it imports from its biggest customers - China, South Korea, India and Japan.
Sanctions on financial transactions with Iran have already made it difficult for buyers to pay for oil from the OPEC producer, triggering supply worries and supporting oil prices.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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