Oil slipped on Thursday, after prices hit 11-week highs, on worries about looming U.S. budget battles and signs of growing concern by the U.S. Federal Reserve about buying bonds to spur economic growth.
Focus shifted from the fiscal cliff deal reached earlier this week to the upcoming wrangling U.S. President Barack Obama and Republicans in Congress will face over the budget, which could put further stress on the world's biggest economy. (Read More: Why 'Cliff' Deal Is Your Reason to Buy These Commodities: Pro)
The oil markets have been closely watching the U.S. budget crisis, as well as ongoing problems in the euro zone, for signs it could further dampen struggling fuel demand.
Brent crude jumped to over $112 a barrel for the first time since mid-October on Wednesday after the fiscal cliff deal was reached, but players said the market was awaiting strong signs that the economy was improving to extend the rally longer term.
"The uncertainty because of the budget cuts and the ceiling debate seem to have tempered the markets enthusiasm that things were getting better and that's why things have stalled," said Gene McGillian, analyst, Tradition Energy in Stamford, Connecticut.
"I think we probably have more to go on the rally but a significant rally from here has to come from signs the economy is really improving."
Prices fell further in a wider sell off of risk assets, including equities, in U.S. afternoon trade after minutes from the Federal Open Market Committee showed rising concern about the risks of the Fed's policy of buying bonds to stimulate growth.
Brent crude futures settled 33 cents lower at $112.14 a barrel after rising more than 1 percent on Wednesday to settle at their highest level since October. U.S. light, sweet crude fell 20 cents to settle at $92.92 a barrel, erasing smaller gains from earlier in the day after the Fed minutes were released.
Brent's premium to U.S. crude narrowed, in part due to news a major expansion of the Seaway pipeline — aimed at easing the bottleneck at the Cushing, Oklahoma oil hub which has depressed U.S. prices — should be at full rates by the end of next week.
The spread between Brent and narrowed to just over $19 a barrel on Thursday, down from 2012 highs of about $26.
The spread between Brent and West Texas Intermediate narrowed to just over $19 a barrel on Thursday, down from 2012 highs of about $26.
Brent trading volumes were healthy, about 17 percent above the 30-day moving average, while U.S. crude trade was about average for that period.
Eyes on Economic, Inventory Data
U.S. economic data released Wednesday was mixed, with U.S. private-sector employment data coming in stronger than expected. A separate report showed the number of Americans filing new claims for unemployment benefits rose last wee, and traders will now be closely watching out for payrolls data coming out on Friday.
Data also showed the service sector of No.2 oil consumer China expanded in December, fueling hopes that the world's second-largest economy and top energy consumer is recovering.
U.S. commercial crude oil stockpiles are likely to have fallen last week due to lower imports as refiners drew down inventories for year-end tax purposes, a Reuters poll of analysts showed.
The American Petroleum Institute (API) will release its report on Thursday, delayed due to the New Year day's holiday on Tuesday. The U.S. government's Energy Information Administration (EIA) will issue its data on Friday.