Oil prices fell on Wednesday, hit by expectations fuel demand will remain weak next year even if the U.S. Congress reaches a deal to avoid the looming "fiscal cliff".
Comments by U.S. House Speaker John Boehner voicing optimism that Republicans could broker a pact with the White House to avoid an impending budget crisis at the year-end helped lift crude off early lows and turn U.S. stocks higher.
However, government data showing another week of low demand and a large build in gasoline inventories reinforced bearish expectations for global fuel consumption during afternoon trade.
"I don't think anyone wants to put on a big position," said Richard Ilczysyn, chief market strategist and founder of iitrader.com LLC in Chicago.
"There's a belief that in 2013 demand will be relatively low and the economies are going to be relatively weak around the world," he said, adding: "You've got oil coming online in the United States and you need big demand to get the market moving."
Further pressure came from Commerce Department data showing new U.S. single-family home sales fell slightly in October. The prior month's pace of sales was also revised sharply lower, casting a small shadow over what has been one of the brighter spots in the U.S. economy.
Brent crude fell 36 cents to settle at $109.51 a barrel. The international benchmark traded as low as $108.44 a barrel during intraday activity, breaking below the 20-day moving average of $109.39 before recovering to settle above it.
U.S. crude shed 69 cents to settle at $86.49 a barrel, near the 14-day and 20-day moving averages of $86.71 and $86.54 a barrel, respectively.
U.S. RBOB gasoline futures led the oil complex lower for most of the day, but the front-month December contract turned slightly higher before settlement ahead of the Friday expiry. Later-month gasoline futures remained negative.
The U.S. budget debate is the latest economic factor to hold sway over oil markets, which have been closely watching the euro zone crisis in recent months and watching macro data for demand direction.
Ilczysyn said that if not for the growing concerns about Middle East oil supplies due to unrest in the region, prices could drop further. Traders have also been closely watching the mounting political crisis in Egypt and escalating violence in Syria for signs of increasing risks to exports from the region, which supplies a third of the world's oil.
Hundreds of demonstrators were in Cairo's Tahrir Square for a sixth day on Wednesday, demanding President Mohamed Mursi rescind a decree they say gives him excessive powers, while two of Egypt's top courts stopped work in protest.
Adding to concerns, the Muslim Brotherhood and hardline Salafi parties will hold protests across Egypt on Saturday in support of Mursi.
Some experts argued the risk to oil supplies could soon trump global demand woes.
"The Middle East looks set to be a major source of uncertainty in the New Year," said David Hufton, managing director at PVM, in a note.
"That provides a key support for oil prices and could well sabotage even the most persuasive set of bearish physical supply/demand figures."
Still, analysts pointed to weekly U.S. inventory data released by the Energy Information Administration to reinforce the bearish case. Gasoline stockpiles showed a near 3.9-million-barrel build last week, well over analyst expectations for a 900,000-barrel gain, as demand again trailed year-ago levels.
Stockpiles on the East Coast, where Hurricane Sandy devastated the fuel distribution network earlier this month, also rose, as did distillate inventories in the region.
A small drop in total U.S. crude inventories countered expectations of a build, but was not enough to offset the pressure of the gasoline increase, analysts said.
"Today's EIA data was bearish, with a much greater-than-expected build in gasoline stocks as refineries came back online following Hurricane Sandy," said Chris Jarvis of Caprock Risk Management in Boston, noting the draw in crude stocks was small.
"Given the robust level of crude stocks that are well over the five-year average, it was not enough to offset the bearishness in the gasoline data." (Reporting by Matthew Robinson in New York; Additional reporting by Simon Falush and Shadia Nasralla in London and Luke Pachymuthu in Singapore; Editing by Dale Hudson)