Oil prices fell on Tuesday, as concerns about the U.S. budget crisis and global fuel demand outweighed ongoing worries about instability in the Middle East.
Markets have been on edge for weeks about whether U.S. lawmakers can make a budget deal by year end to avert the "fiscal cliff" -- automatic spending cuts and tax hikes that analysts say could stoke a recession.
Oil markets also have been weighed down by euro zone troubles this year. Even if a U.S. budget deal is reached, market players said oil prices would be dragged by the prospect that oil demand would remain weak next year in many developed economies.
"The reality is that we're going to get through the fiscal cliff," said Richard Ilczyszyn, chief market strategist of iitrader.com LLC in Chicago, noting that worries about the impact of instability in the Middle East on oil supplies was on the back burner for the moment.
"Demand is relatively still weak for oil."
Protests in Egypt, escalating violence in Syria and the West's standoff with Iran over its disputed nuclear program have stoked concerns about the supplies of oil from the region, which supplies a third of the world's crude.
Gold prices also fell on Tuesday, while U.S. stock markets were little changed.
Front-month Brent crude futures traded down $1.08 to settle at $109.84 a barrel, settling below the 20-day moving average of $109.89 a barrel for the first mid-November.
U.S. crude oil futures gave up 59 cents to settle at $88.50 per barrel, bouncing off the 14-day moving average when it hit the intraday low of $87.57 a barrel.
Trading in U.S. crude was light, with volumes about 28 percent lower than the 30-day moving average. Brent volumes were average.
Demand concerns increased after the Institute for Supply Management (ISM) said on Monday its index of U.S. factory activity fell to its lowest since July 2009.
"The set-back in the ISM erases for now the idea that the U.S. economy is decoupling from the rest of the world," said Olivier Jakob from Petromatrix consultancy.
Amid talk of weak product demand, inventory data for the week to Nov. 30 was expected to show an 800,000 barrel increase in distillate stockpiles, while gasoline inventories were seen up by 1.8 million barrels, according to an expanded poll of analysts by Reuters. Crude stocks were seen down by 300,000 barrels.
Data from the American Petroleum Institute (API) will be released later Tuesday, while the U.S. Energy Information Administration will release its weekly report on Wednesday.
(Reporting by Matthew Robinson in New York; Shadia Nasralla in London; Ramya Venugopal in Singapore; Editing by Sofina Mirza-Reid and Alden Bentley)