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US Crude Settles Lower, Weighed by Worries Over Cliff

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Crude-oil futures languished in light preholiday trade Monday as many chose to sit out rather than risk taking a loss if no deal is struck to avoid the looming fiscal cliff.

"It just didn't appear there was a whole lot of desire or a whole lot of conviction on either side to do much of anything," said Kyle Cooper, managing partner of IAF Advisors in Houston.

Crude for February delivery settled 5 cents, or 0.1%, lower at $88.61 a barrel on the New York Mercantile Exchange. Brent, the European benchmark, finished down 0.2%, or 17 cents, at $108.80 a barrel.

President Barack Obama and congressional Republicans have failed to agree on a budget that would prevent tax increases and spending cuts from automatically going into effect in January. Negotiations appear to have made little progress with just a handful of trading days remaining in the year.

"People are sitting out and waiting--holding out some hope there will be a patch, and more serious negotiations will take place in January," said Andy Lebow, a trader and broker for Jefferies.

The measures set to go into effect are expected to hinder economic growth and job creation, which would reduce demand for oil for use in manufacturing and in gasoline.

Though the impact to demand might not be immediate, failure to reach a deal could cause investors to lose confidence and prices could fall.

"If taxes increase and spending is cut, and the budget office is correct that we're heading into recession, obviously that's going to have a negative impact on oil demand," Mr. Lebow said. "But for the next two weeks, [the effect] would be more short-term trading-oriented than actual demand effect."

Gene McGillian, a broker and analyst with Tradition Energy, said he doesn't think the crude-oil market has the momentum to break out of the narrow band in which futures have been trading in recent months. The front-month Nymex contract hasn't convincingly traded above $90 a barrel since mid-October.

"Normally at the end of the year we see a strengthening," he said. "This year we may not see too much because of the inability of the market to get above $90."

He said concerns about the global economy and debt crisis would continue to weigh on the market into the new year.

Mr. Cooper, of IAF Advisors, said he expects oil prices could be volatile in the next few days because there will likely be fewer traders in the market.

"If someone of size interprets something as significant and wants to get something done, there won't be very many people on the other side," he said. "I suspect we could see quite a lot of fireworks."

Copyright (c) 2012 Dow Jones & Company, Inc.

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