Brent crude fell towards $109 a barrel this morning after talks in the United States to reach an agreement on the budget crisis stalled, reviving worries about demand in the world's biggest oil consumer.
Republican lawmakers failed to back an effort to avert $600 billion worth of indiscriminate tax hikes and spending cuts that threaten to push the US economy into recession next year.
The dramatic twist, coming after growing optimism just a few days earlier of an agreement, weighed on Asian shares, the euro and base metals.
Brent crude slipped 57 cents to $109.63 a barrel by 04.39 GMT, declining for a second day.
The contract is set to rise for a second week. The stalemate had a larger impact on US oil, which fell as low as $88.93 and traded $1 lower at $89.13. It is set to slide nearly 3 per cent this week.
"The latest news that came out just a few hours ago has caused the broader markets to sell," said Victor Shum, managing director at IHS Purvin & Gertz. "There's a view that it's a setback for talks between the Republicans and the White House."
Only 11 days are left to prevent automatic tax hikes and spending cuts, referred to as the fiscal cliff, and House of Representatives speaker John Boehner faced a setback when he failed to unite his lawmakers as many conservative Republicans are opposed to tax hikes on the richest wage-earning Americans.
A bullish target at $111.45 per barrel has been temporarily halted for Brent as it was unable to break resistance at $110.50, while US oil is expected to hover around resistance at $90.30 or retrace moderately to $89, according to Reuters technical analyst Wang Tao.
But the overall outlook for oil demand growth looks set to improve for 2013 on the back of signs of a recovery in the US economy, said Ric Spooner, chief market analyst at CMC Markets.
Reuters
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