Oil declined for the first time in four days in New York after US President Barack Obama's administration rejected a Republican budget plan.
Futures fell as much as 1.7 per cent as Republicans and Democrats try to avert more than $US600 billion in automatic tax increases and spending cuts that start in January, known collectively as the fiscal cliff. A report tomorrow will probably show that US supplies of gasoline rose to the highest level since August last week, a Bloomberg survey showed.
"The Democrats and Republicans are stuck in a race against time," said Phil Flynn, a senior market analyst at the Price Futures Group in Chicago. "Concerns that they won't come to an agreement by the end of the year have investors worried. If we go off the fiscal cliff, the economy could take a hit."
Crude oil for January delivery dropped 73 cents, or 0.8 per cent, to $US88.36 a barrel at 1:08 p.m. on the New York Mercantile Exchange. Prices are down 11 per cent this year.
Brent oil for January settlement decreased $US1.28, or 1.2 per cent, to $US109.64 a barrel on the London-based ICE Futures Europe exchange.
Oil in New York is snapping its longest rising streak in a month after futures reached technical resistance along the upper Bollinger Band, around $US89.91 a barrel today, according to data compiled by Bloomberg. Futures halted advances from mid-July to mid-September near this indicator. Sell orders tend to be clustered close to chart-resistance levels.
US House Speaker John Boehner and other Republican Party leaders proposed $US2.2 trillion of spending cuts and new revenue that lack what Obama calls essential for a fiscal agreement: higher tax rates for top-earning Americans.
Previously, Republicans had insisted on revenue achieved only through economic growth, and last week they rejected Obama's proposal to raise $US1.6 trillion in taxes.
"The market is under pressure because it doesn't look like anything is getting done at the moment," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $US1.4 billion. "It's probably an overreaction. It seems likely that they will come to some sort of agreement."
Obama said in a Bloomberg Television interview today that that the Republican offer doesn't go far enough and won't raise the revenue needed to shrink the deficit by $US4 trillion over the next decade.
The Standard & Poor's GSCI Index of 24 raw materials fell as much as 1.2 per cent, led by declines in cocoa, silver, coffee and European heating oil.
US gasoline stockpiles probably rose 1.6 million barrels last week, according to the median estimate of 11 analysts surveyed by Bloomberg before tomorrow's Energy Department report. Supplies of distillate fuel, a category that includes heating oil and diesel, probably increased 1 million barrels.
Gasoline for January delivery dropped 4.02 cents, or 1.5 per cent, to $US2.6863 a gallon in New York. January heating oil fell 5 cents, or 1.6 per cent, to $US3.0062 a gallon.
Crude supplies are forecast to have decreased for a third week, sliding 500,000 barrels, the survey showed. The refinery utilization rate probably increased 0.5 per centage point to an average 89.1 per cent of capacity. That would mean plants operated at the fastest rate since the week ended Aug. 24.
The American Petroleum Institute in Washington will release separate inventory data today. The industry group collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.
US manufacturing unexpectedly contracted in November for the fourth time in the last six months, the Institute for Supply Management reported yesterday. US factory output fell to the lowest level since July 2009. Oil, which traded at a six-week intraday high before the report yesterday, pared gains after it was released.
"We have a lot to be worried about," said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. "There's a lot of negative sentiment because the fiscal cliff negotiations don't appear to be moving toward a solution. The manufacturing numbers yesterday were soft, which is boosting concern about the economy."
OPEC will probably keep its output quota unchanged for a second successive meeting next week as members judge prices high enough to cover their spending needs, according to a Bloomberg survey. The 12 member nations pump more than 40 per cent of the world's oil, earning revenue of more than $US1 trillion a year, according to OPEC data.
All 17 analysts in the survey conducted from Nov. 29 through yesterday said there will be no change to the collective ceiling of 30 million barrels a day agreed on almost a year ago. Ministers from the Organization of Petroleum Countries are scheduled to gather Dec. 12 in Vienna.
Electronic trading volume on the Nymex was 256,724 contracts as of 1:10 p.m. Volume totaled 438,707 contracts yesterday, 17 per cent lower than the three-month average. Open interest was 1.55 million.