Oil Dips As Fears Of ‘Fiscal Cliff’ Intensify

Oil prices largely recovered early losses but still closed a hair lower on Monday as a late gasp of holiday-thinned buying failed to counter fears that the U.S. “fiscal cliff” budget crisis could erode oil demand in the world’s top consumer.

With no apparent talks on Monday to avert the year-end budget deadline that will trigger harsh spending cuts and tax hikes, oil tracked equity markets slightly lower for most of the session, with trading volume less than one-fifth the norm. Markets closed early and are shut on Tuesday for Christmas Day.

Brent crude staged a light rally into the close, shaking off earlier losses of more than 80 cents to settle at $108.80, down 17 cents on the day. U.S. oil settled 5 cents lower at $88.61, down 10 percent on the year. U.S. equity markets dipped marginally, while the dollar was little changed.

Oil slumped on Friday after the budget talks dissolved. President Barack Obama and Republican House Speaker John Boehner, the key negotiators, are out of town for Christmas; the Capitol was deserted on Monday, and the Treasury Department was closed. Congress returns from recess later this week, just days before the Jan. 1 deadline.

Even as the cliff looms, Brent crude has yet to test the $106-$107 region that has provided key technical support since September, with many traders doubting that lawmakers will risk the fragile U.S. economy tipping again into recession.

“Although the magnitude of Friday’s sharp selloff suggests that the market is pricing in a lack of fiscal cliff agreement by year’s end, we still feel that some type of last-minute resolution will be forthcoming,” Jim Ritterbusch, president of Chicago-based Ritterbusch & Associates, wrote in a note.

Some investors are now looking at a stop-gap that puts everything off for a while as the most promising alternative. Such a fix may help delay the spending cuts and tax hikes further into 2013 as well as work to address in a long-term way a budget that has generated deficits exceeding $1 trillion in each of the last four years.

“Ultimate success or failure on the fiscal wrangling should provide for one more year-end lurch, but for today it is very, very quiet,” said Again Capital partner John Kilduff.

MIDDLE EAST TENSIONS

Oil losses were restrained by tensions in the Middle East.

Dozens of people were killed in an air strike while queuing for bread in Syria’s central Hama province on Sunday, activists said, with some residents giving an initial count of 90 dead.

Such a toll, if confirmed, would make it one of the deadliest air strikes in Syria’s civil war.

Oil markets have also been on edge through most of the year as tensions between Iran and the West escalated over Tehran’s disputed nuclear programme.

Western sanctions on Iran’s shipping and energy sectors caused serious problems for its oil industry earlier this year but Iran has mostly overcome those challenges, Oil Minister Rostam Qasemi was quoted as saying on Sunday.