Oil Prices Retreat as Budget Uncertainty Continues

Oil prices eased in choppy trading on Thursday, buffeted by unresolved U.S. budget talks and the possibility that looming tax increases and spending cuts could push the top oil-consuming economy into recession.

Crude futures briefly turned higher, then seesawed, in post-settlement trading as U.S. equities cut losses on news that the U.S. House of Representatives will hold a work session on Sunday in an effort to get a budget deal.

Oil and U.S. equities prices had previously come under 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 U.S. "fiscal cliff" remedy.

"It looks like that is where we're headed," Reid, a Democrat, said of the likelihood of the U.S. economy going over the fiscal cliff of tax increases and spending cuts starting in January.

Brent and U.S. crude remained on track to post their third consecutive weekly gains.

While Brent closed in on a full-year increase of around 3 percent, U.S. crude was on track to post a 2012 decline of nearly 8 percent as accelerated domestic crude oil production and tepid demand kept prices in check.

Brent February crude fell 27 cents to settle at $110.80 a barrel, having reached $111.33.

Brent fell to $110.10 in the session, encountering support above the 200-day moving average of $110.01.

U.S. February crude dipped 11 cents to settle at $90.87 a barrel.

U.S. crude dropped to $90.05 intraday before recovering to settle back above the 100-day moving average of $90.66. Thursday's session peak of $91.44 was the highest price for front-month crude since Oct. 19.

Total Brent and U.S. crude trading volumes were around 40 percent below their 30-day averages as the holidays kept turnover thinned.

U.S. January heating oil and RBOB gasoline futures settled higher, also after choppy trading, as the contracts approach expiration on Monday.

Brokers said few investors wished to make large bets on the direction of oil prices until the U.S. budget talks were resolved, or during a holiday period characterized 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.

In a report, Bank of America-Merrill Lynch analysts said of a possible U.S. budget deal: "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.

U.S. consumer confidence fell more than expected in December, dropping to a four-month low, as the fiscal uncertainty pushed back against recent optimism about the economy.

Other data showed the number of Americans filing new jobless benefit claims fell last week to nearly the lowest level in 4-1/2 years, while new home sales last month hit their highest since April 2010.

Oil rose in early trading 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 U.S. 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 Dec. 21, a Reuters poll of analysts showed.

Inventory data from the American Petroleum Institute will be released on Thursday, while the U.S. Energy Information Administration's report will arrive on Friday. Both reports are delayed because of the Christmas holiday.