Crude oil futures slid 1% Thursday as doubts about a U.S. fiscal cliff deal eclipsed any optimism about fresh economic stimulus from the Federal Reserve.
"The market is down on continued concern that there's not been movement on fiscal cliff negotiations, and the fact that both sides might be content that nothing happens this year," said Andy Lipow, president of Lipow Oil Associates in Houston.
Mr. Lipow said that on Jan. 1, the package of tax increases and spending cuts--which goes into effect unless Congress and President Barack Obama negotiate a deal--might have little direct impact on oil demand. However, the tax and spending changes will be phased in over time.
If "significant spending cuts began and we saw an increase in unemployment, that would reduce demand" for oil and petroleum products, he added.
Crude closely tracks employment data as a harbinger of economic expansion, which will require raw materials like oil. Also, the more people employed, the more people using gasoline to drive to work.
Though the fiscal cliff talks reportedly have progressed this week, market participants are uneasy because wide differences remain and uncertainty lingers.
Light sweet crude for January delivery fell 88 cents to settle at $85.89 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures exchange traded 1.5% percent, or $1.59, lower at $107.91 a barrel.
Oil gave up nearly all its gains from Wednesday, when the U.S. Federal Reserve announced that it would expand its bond-buying program and keep interest rates low until the country's unemployment rate drops to 6.5%.
That fueled a wave of optimism Wednesday that that U.S. economic recovery, and along with it demand for crude oil, would get a shot in the arm. Also, economic stimulus has tended to weaken the U.S. dollar, which attracts foreign investors to dollar-denominated crude futures.
But John Kilduff of Again Capital said the Federal Reserve's plan to tie interest rates to a drop in unemployment could mean that a tightening in monetary policy might come sooner than some in the market expected.
If that happens, "crude would lose some of its traction to some investors as an inflation hedge" and the higher interest rates be a headwind for economic growth, Mr. Kilduff said.
Traders said supply-and-demand forces also contributed to oil's losses.
The U.S. Energy Information Administration announced on Wednesday that crude oil stockpiles increased by 800,000 barrels last week, boosting supplies when a Dow Jones survey of experts predicted a 2.1-million-barrel decline in stockpiles.
And some reports of a refinery outage kept a lid on oil prices, reflecting muted demand for crude. Jefferies trader Andy Lebow said crude prices reflected reports of planned maintenance at Philadelphia Energy Slutions's Girard Point refinery, which the company has not confirmed.
Also, Motiva Enterprises's $10 billion expansion of its Port Arthur, Texas, refinery suffered a setback this week when a small fire prompted a shutdown of the gasoline-making crude unit, though a source says it could restart this weekend.
Front-month January reformulated gasoline blendstock, or RBOB, settled 4.44 cents per gallon, or 1.58% lower, at $2.6021, erasing Wednesday's gains.
Heating-oil futures settled 2.31 cents per gallon, or 0.78% lower at $2.9437.
Copyright (c) 2012 Dow Jones & Company, Inc.
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