Oil Drops From Two-Month High on U.S. Budget Standoff

Crude fell from the highest price in more than two months as Senate Majority Leader Harry Reid said lawmakers and President Barack Obama are unlikely to reach a deal to avert a fiscal crisis.

Oil slipped amid few signs of an agreement to prevent $600 billion in automatic U.S. tax increases and spending cuts set to begin Jan. 1, known collectively as the fiscal cliff. Reid said today that there is not enough time to resolve the dispute before the first of the year. Earlier, futures advanced as jobless claims fell.

“Reid said we are going to go over the cliff and traders are backing away until next year,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The fiscal cliff is really holding back oil. It’s taking a toll on the psychology of the market.”

Crude oil for February delivery slipped 11 cents to settle at $90.87 a barrel on the New York Mercantile Exchange after rising to $91.44, the highest intraday level since Oct. 19. Trading volume for West Texas Intermediate futures contracts was down 40 percent from the 100-day average.

Prices were little changed after the American Petroleum Institute reported oil inventories dropped 1.17 million barrels last week to 370.5 million. Crude gained 13 cents to $91.11 a barrel at 4:58 p.m. in electronic trading. It was at $91.02 before the report was released at 4:30 p.m.

Oil also rebounded in electronic trading after the settlement as the House of Representatives planned to hold its first Sunday session in more than two years, fueling optimism a budget deal will be reached. Republican members agreed to the Dec. 30 session on a call today with House GOP leaders.

WTI-Brent Spread

Brent oil for February settlement slid 27 cents to $110.80 a barrel on the London-based ICE Futures Europe. The number of contracts trading was 53 percent lower than the 100-day average. The European benchmark crude was at a premium of $19.93 to WTI.

WTI has declined 8.1 percent in 2012 as a U.S. shale boom deepened the glut at Cushing, Oklahoma, America’s biggest storage hub. That has left it at an average $17.47 below Brent this year, compared with a premium of about 95 cents in the 10 years through 2010. Brent, the benchmark grade for more than half the world’s crude, has risen 3.2 percent this year.

A failure to reach an agreement on the budget plan might push the U.S., the world’s biggest crude consuming country, into recession for the first half of 2013, the nonpartisan Congressional Budget Office has said.

Budget Talks

“I don’t know time-wise how it can happen now,” Reid, a Nevada Democrat, said on the Senate floor today. He also said that House Speaker John Boehner, an Ohio Republican, should call members back to deal with the fiscal issues.

Obama and the Democratic-led Senate returned to Washington today to resume negotiations.

“We might have a couple of choppy days,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “It hinges on whether we get some kind of agreement in Washington.”

Obama is pressing lawmakers to craft an interim deal to prevent the automatic tax increases and spending cuts. The House has balked at the higher taxes for top earners that the president and other Democrats say are needed in any deal.

“To step in front of the possibility of a deal or no deal in any market including oil would be silly,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

Consumer Confidence

Confidence among U.S. consumers declined more than forecast in December as the budget debate soured Americans’ outlook for the economy. The Conference Board’s index of sentiment fell to 65.1 from a revised 71.5 reading the prior month, figures from the New York-based private research group showed. The gauge was projected to fall to 70 in a Bloomberg survey showed.

Oil also followed losses in U.S. equities. The Standard & Poor’s 500 Index declined 0.1 percent. It dropped as much as 1.3 percent in intraday trading before rebounding on the plans for the House session.

Crude rose earlier after the Labor Department said applications for jobless benefits decreased 12,000 to 350,000 in the week ended Dec. 22. The four-week moving average of claims, a less-volatile measure, dropped to 356,750, the lowest level since March 2008.

“It’s a good jobless claims number, but it’s overshadowed by the fiscal cliff,” Ilczyszyn said.

U.S. oil stockpiles probably dropped 1.75 million barrels, or 0.5 percent, in the week ended Dec. 21 to 369.9 million, the least since Oct. 12, according to the median of 10 analyst estimates surveyed before an Energy Department report tomorrow.

The weekly report is scheduled for release at 11 a.m. tomorrow in Washington, two days later than usual because of the Christmas holiday. The API report was also two days late.

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