Oil prices eased in choppy trading Thursday as unresolved US budget talks left open the possibility that looming mandated tax hikes and spending cuts could push the top oil-consuming economy into recession. Brent and US crude remained on track for weekly gains, but while Brent closed in on a full-year gain of more than 2 percent, US crude was on pace to post a 2012 decline of around 8 percent on accelerated domestic crude oil production.
Oil and US equities prices on Wall Street felt pressure from comments by Senate Majority Leader Harry Reid criticizing Republicans in Congress for refusing to go along with any tax increases as part of a US "fiscal cliff" remedy. "It looks like that is where we're headed," Reid, a Democrat, said of the likelihood of the US economy going over the fiscal cliff of tax increases and spending cuts starting in January.
US President Barack Obama was returning to Washington on Thursday, cutting short his holiday to try to get a budget deal with Republican lawmakers. Brent February fell 74 cents to $110.33 a barrel by 12:21 pm EST (1721 GMT) after reaching $111.33. Brent fell to $110.10 in the session, encountering support above the 200-day moving average of $110.01.
US February crude was down 55 cents at $90.43 a barrel, back below the 100-day moving average of $90.66 after reaching $91.44 during the session, its highest level since October 19. Total Brent and US crude trading volumes were 60 percent below their 30-day averages as the holidays kept volume thinned. US January refined products futures were mixed in choppy trading, with heating oil finding seasonal support and RBOB gasoline easing. Brokers said few investors wished to make large bets on the direction of oil prices until the US budget talks were resolved, or during a holiday period characterised by low trading volumes.
"We continue to find it difficult to have a directional position in a low-volume environment in front of the fiscal cliff uncertainty," said Olivier Jacob, an energy market consultant at Petromatrix in Zug, Switzerland. Bank of America-Merrill Lynch analysts said in a report that a US budget deal might only come at the last minute: "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."
Investors reacted to mixed economic data from the United States on Thursday. Oil rose in early trading on Thursday as Japanese stocks 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. Concerns about potential supply disruptions in the Middle East remained supportive to oil prices and were reinforced after United Arab Emirates security forces arrested a cell of UAE and Saudi Arabian citizens that the UAE said was planning attacks in both countries and other states.
Also supporting prices were expectations that US crude stockpiles decreased last week as refiners used up existing inventories for year-end tax advantages. Crude stocks were expected to be down by 1.9 million barrels in the week to December 21, a Reuters analyst poll on Wednesday showed. Inventory data from the American Petroleum Institute will be released on Thursday, while the US Energy Information Administration's report will arrive on Friday. Both reports are delayed because of the Christmas holiday.
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