Brent slips to $110, stalled US fiscal talks dent demand outlook

Jessica Jaganathan
Reuters Middle East

* U.S. crude and distillate stocks fall, capping oil price


* Promising German data supports sentiment

SINGAPORE, Dec 20 (Reuters) - Brent crude slipped on

Thursday to trade near $110 a barrel as investors took profits

from recent gains after talks to avert a U.S. fiscal crisis

stalled, stoking worries about demand from the world's biggest

oil consumer.

As a year-end deadline nears, U.S. President Barack Obama

and House of Representatives Speaker John Boehner remained

locked in intense bargaining over a possible deal to avoid the

so-called fiscal cliff of harsh tax hikes and automatic spending

cuts that could badly damage an already weak economy.

Significant progress seemed to have been made earlier this

week with both Obama and Boehner offering substantial

concessions, but talks turned sour again with Obama accusing

opponents of holding a personal grudge against him while the top

Republican negotiator called the president "irrational".

"Negotiations are (not progressing) which is probably why

we're seeing a sell-off today and the risk sentiment coming

off," said Natalie Rampono, a commodities analyst at ANZ in

Melbourne. "The markets are being directed by sentiment from the

U.S. fiscal cliff talks and so that will have the biggest

influence on prices at the moment."

Brent crude slipped 35 cents to $110.01 a barrel by

0340 GMT, after settling $1.52 higher in the previous session

which was the biggest one-day gain since Nov. 19.

U.S. oil fell 40 cents to $89.58.

While investors still believe the United States will be able

to avert a fiscal crisis, oil prices and other riskier assets

will remain under pressure as the deadline comes closer with no

signs of a deal yet.

However, a patch of promising data from Germany and the

United States kept a floor under prices.

Morale at German businesses climbed in December as their

confidence in the outlook rose at its fastest rate in 2-1/2

years, boosting hopes Europe's largest economy will bounce back

quickly after a weak end to 2012.

Also adding to positive sentiment was data showing U.S.

homebuilding permits touched their highest level in nearly 4-1/2

years in November.

Investors are now eyeing weekly U.S. data on jobless claims

due later on Thursday for further clues on the country's

economic health.


Oil prices also found early support from a drop in U.S.

crude oil and distillate stocks.

Crude stocks fell by 964,000 barrels to 371.65 million

barrels, compared with an average analyst forecast for a 1.1

million barrel drawdown in a Reuters poll. Crude imports fell

101,000 barrels per day (bpd) to 8.36 million bpd.

Distillates, which include diesel and heating oil, fell 1.09

million barrels to 116.97 million barrels, versus analyst

expectations for a 1 million-barrel build.

"Oil prices could get a little bit of support ... in the

slight pick up in heating oil demand with the drop in distillate

inventory being greater than expectations ... So if product

prices increase, that could sometimes influence oil market

sentiment," Rampono said.

Oil prices could also be underpinned by a little-noticed

provision in U.S. sanctions against Iran beginning in February

that is likely to trap payments abroad for its oil exports

running into billions of dollars.

The provision could halt most of the flow of petrodollars to

Iran, given that the value of its oil exports is far higher than

what it imports from its biggest customers - China, South Korea,

India and Japan.

Sanctions on financial transactions with Iran have already

made it difficult for buyers to pay for oil from the OPEC

producer, triggering supply worries and supporting oil prices.

(Editing by Himani Sarkar)

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