Brent Drops Below $112 as US Budget Talks Loom

Brent crude fell below $112 a barrel on Thursday as the prospects of more budget battles in the United States and rising oil supply weighed on prices, although upbeat economic data from China limited losses.

President Barack Obama and congressional Republicans face even bigger budget wrangling in the next two months after a hard-fought deal halted a round of automatic fiscal tightening that threatened to push the world’s largest economy into recession.

“After the initial excitement, reality sets in,” said oil consultant at IHS Purvin & Gertz. “There will be other negotiations and the deal is a compromise.”

Brent crude fell 52 cents to $111.95 a barrel by 0802 GMT after rising more than 1 percent on Wednesday to settle at the highest since October.

U.S. crude for February delivery was down 50 cents to $92.62 after closing at its highest since September.

“In 2013, OPEC may have to limit supply in order to accommodate a rise in non-OPEC oil production growth.”

Analysts expect oil prices to drop in 2013 as supply outweighs demand. U.S. crude production has hit a 19-year high while Russia pumped the most oil in the world last year, ahead of Saudi Arabia.

But losses in oil prices were checked by data showing China’s services sector expanded in December, fueling hopes that the world’s second largest economy and top energy consumer is recovering.

Spread Narrows

U.S. crude prices are expected to find support as a major pipeline expansion that aims to ease the bottleneck at Cushing, Oklahoma – the delivery point for West Texas Intermediate crude oil futures – should pump at full rates from the end of next week.

The spread between Brent and West Texas Intermediate has narrowed to about $19 a barrel, down from 2012 highs of about $26.

Investors will be scouring weekly data on U.S. jobless claims and oil inventories due later on Thursday for further cues on the economic health of, and fuel demand in, the world’s largest economy.

U.S. commercial crude oil stockpiles likely fell last week due to lower imports as refiners drew down inventories for year-end tax purposes.

The U.S. government’s Energy Information Administration (EIA) will issue its data on Friday.