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Oil Edges Lower on Bearish Inventory Report, Fiscal Cliff Worries

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U.S. oil prices edged lower Friday on concerns about U.S. fiscal talks and after a U.S. inventory report showed surprisingly robust oil and petroleum product inventories.

U.S. crude futures for February delivery, which spent the morning in positive territory, settled at $90.80 per barrel on a day of light trading, down 7 cents.

Analysts said concerns over the negotiations in Washington were a drag on oil prices. The worry is that a failure to avert the "fiscal cliff" could lead to draconian spending cuts and tax increases that could depress the economy, squashing oil demand.

Investors were focusing on an afternoon meeting of Washington power brokers, but hopes were low for a wide-reaching agreement. Tariq Zahir, managing member of Tyche Capital Advisors, said he sees no chance for a major deal but believes Washington policy makers could still strike a "minimal" deal.

"If we get no deal, I think crude could go lower and pretty significantly lower," Mr. Zahir said.

Oil prices also retreated after the 11 a.m. release of U.S. oil inventories that showed crude and petroleum product stocks were higher than expected. Crude-oil stockpiles fell by 586,000 barrels to 371.1 million barrels for the week ended Dec. 21, compared with an average survey estimate calling for a drop of 1.9 million barrels. The inventories have increased 13% from the year-ago levels, the department's Energy Information Administration said in its weekly report.

"It's somewhat of a bearish report," said John Kilduff, a trader at Again Capital.

Inventories of petroleum products also increased more than expected, with gasoline stockpiles rising by 3.8 million barrels to 223.1 million barrels, compared with a build of 400,000 barrels forecast in a Dow Jones Newswires survey of analysts.

Distillate stocks, which include heating oil and diesel fuel, rose by 2.4 million barrels to 119.4 million barrels, compared with analysts' forecast of a decline of 300,000 barrels.

U.S. stocks at the much-watched Cushing, Okla., hub stand at 49.2 million barrels, up 2.2 million barrels from the previous week. Cushing is the delivery point for the benchmark Nymex oil contract. An excess supply of crude at Cushing has depressed prices of U.S. crude, causing the price gap between the U.S. and the international crude benchmarks to widen.

Despite Friday's report on Cushing, the spread between Brent and WTI fell to its lowest gap since Oct. 2. Analysts said the retreat was the result of additional pipeline capacity that will allow more of the crude to move from Cushing to Gulf Coast refiners.

Write to John Biers at john.biers@dowjones.com

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

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