Brent oil slipped below $109 per barrel on Monday as worries about a looming fiscal calamity in top consumer the United States renewed fears of a further slowdown in oil demand growth.
Concerns about the United States tipping into recession as a result of about $600 billion in expiring tax cuts and spending reductions weighed across financial markets, pushing Japan's Nikkei average to a four-week low. But the drop in oil prices was checked by recent data showing China's implied oil demand surged in October.
Brent crude, which slipped as much as 50 cents to $108.90 a barrel, traded 20 cents lower at $109.20 by 0722 GMT. U.S. oil slipped 18 cents to $85.89, after ending up more than 1 percent last week following a three-week slide.
"Traders will be on the sidelines till the time there is clarity on the core risk issues concerning the global economy," said Ric Spooner, chief market analyst at CMC Markets in Sydney. "The U.S. fiscal cliff is a source of concern."
Oil markets were also pressured by data showing Japan's economy shrank 0.9 percent in July-September from the previous quarter. It was the first contraction in three quarters, suggesting faltering global demand and weak consumer spending may push the economy into a mild recession.
Brent gained 2 percent on Friday while the U.S. benchmark increased more than 1 percent, a rise some saw as an opportunity to sell and lock in profits.
"Friday markets rallied, so it is normal to have a bit of a sell off after a rally," said a Singapore-based trader. "Also, Japan GDP is down sharply and that's weighing on markets."
Brent is expected to revisit its November 8 low of $106.12 per barrel as it seems to be consolidating within a triangle, according to Reuters technical analyst Wang Tao.
Yet, the fall in Brent from a high of $116.20 touched on October 16 - its loftiest since September 17 - may have been excessive and prices may recover towards $112, Spooner said. U.S. oil may rise to $90, he said.
Implied oil demand in China, the world's second-largest fuel user, grew 6.5 percent in October from a year earlier, close to September's record high as demand was underpinned by fuel inventory building and new production capacity.
China used roughly 9.71 million barrels per day (bpd) of oil last month, close to September's record high of 9.79 million bpd, according to Reuters calculations based on refinery output and net imports of refined fuels.
Overall, the country's economy strode further along the road of recovery from its slowest growth in three years as infrastructure investment accelerated and output from factories ran at its fastest in five months.
"It was encouraging to see an improvement, though it was not really a game changer," Spooner said.
The global oil market is in good shape and Saudi Arabia is happy with the current oil price, Saudi Oil Minister Ali al-Naimi said.
OPEC heavyweight Saudi Arabia and its Gulf Arab allies have kept output high all year to keep prices under control. The extra oil has helped reverse a spike in prices that took Brent to $128 a barrel in March as tensions between the West and Iran escalated over Tehran's controversial nuclear programme.
"The market really is in good shape. We are very happy with the situation in the market," Naimi told reporters on the sidelines of an oil and gas exhibition in Abu Dhabi.
Naimi's comments suggest the oil market is in a neutral zone, Spooner said. It also suggests that Saudi Arabia and its allies will continue to keep the market well-supplied to keep prices around the current levels, he said.