Oil slips below $111 on U.S. budget worries

Last Updated: Thu, Dec 27, 2012 09:57 hrs
A man fills a jerry can with diesel at a fuel station in Juba

Brent crude oil slipped below $111 a barrel on Thursday as nervous investors watched talks to avert a U.S. budget crisis that could push the world's biggest economy back into recession.

U.S. President Barack Obama cut short his Christmas holiday to try to agree a deal with Republican lawmakers to avert the so-called "fiscal cliff" - billions of dollars of tax hikes and spending cuts due to take effect next week.

Economists say any deal is likely to involve big cuts in the government budget and a reduction in consumer spending power, which would be expected to dampen demand in the world's largest oil market. But almost any deal would be better than none.

"While markets have vacillated between optimism and pessimism over the prospects for a compromise, we expect a deal only at the last minute, with lots of decisions delayed into the New Year and austerity of roughly 2 percent of GDP," Bank of America-Merril Lynch analysts said in a report.

Brent was down 37 cents to $110.70 per barrel by 0845 GMT, after gaining 2 percent in the previous session. U.S. crude gained 10 cents to $91.08, after rising to a nine-week high on Wednesday.

Oil rose in Asian trade, following Japanese stocks, which hit an 18-month high after the country's new prime minister said beating deflation and weakening the yen were his top priorities.

Japan's government will pursue bold monetary policy, flexible fiscal policy and a growth strategy to encourage private investment, Prime Minister Shinzo Abe said.

Worries over supplies from the Middle East revived after security forces in the United Arab Emirates arrested a cell of UAE and Saudi Arabian citizens which they said was planning to carry out militant attacks in both countries and other states.

The region holds some of the world's largest oil fields and unrest in the area often triggers supply concerns.

Also supporting prices were expectations that U.S. crude stockpiles may have decreased last week as refiners kept inventories low for year-end tax purposes.

Crude stocks may have dropped by 1.9 million barrels in the week ended Dec 21, a Reuters poll showed on Wednesday.

Inventory data from the American Petroleum Institute will be released on Thursday, while numbers from the Energy Information Administration will be out on Friday, a day later than usual, because of the Christmas holiday.

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