Crude Slips From One-Week High Amid Deadlock In U.S. Budget Talks

The dollar and the yen dropped while the euro advanced approaching the 1.31 figure after the U.S. Federal Reserve launched a fresh round of monetary stimulus to support growth, pushing crude to the highest of $87.65 on Wednesday.

The Fed expanded the asset purchase program by buying $45 billion a month of long-term treasuries starting January on top of the $40 billion in mortgage-backed bonds it started buying in September.

Moreover, the Fed said the interest rate will stay near zero until the unemployment rate drops to 6.5%, and that is until 2015, as long as inflation does not break above 2.5%, and inflation expectations are contained.

This pushed the dollar lower for the third straight day against the rising euro, supporting the purchasing of oil futures, since the “weaker dollar makes commodities like oil less expensive for investors holding other currencies."

Also pushing crude higher Wednesday was the escalation of Syria’s civil war. NATO officials said Bashar al-Assad's forces fired Scud-style ballistic missiles against rebels in recent days, triggering worries of a possible disruption in oil supplies from the region.

However, crude slipped from its one-week high by the end of yesterday’s session, extending the losses today after markets digested the Feds decision and the IEA said oil demand will be sluggish in 2013, while OPEC showed demand for its crude will drop next year.

OPEC left the production quota unchanged for a second time this year at 30 million barrels a day during their meeting in Vienna as prices are seen sufficiently high, yet they expected demand to drop next year mainly backed by rising shale oil output in the United States.

Saudi Arabia’s Oil Minister Ali al-Naimi said Wednesday that Secretary-General Abdullah El-Badri will stay on for another year as head of the OPEC, after the ministers failed to settle on one of the three candidates from Iran, Iraq and Saudi Arabia.

Although the International Energy Agency (IEA) revised its oil demand estimates higher by 110,000 barrels per day to 90.5 million bpd, it showed that demand will be sluggish as the shift in oil demand from the west to the east is accelerating.

“European oil demand underwent the steepest contraction year on year in the third quarter of this year since the 2008-2009 financial crisis, even as Asian oil demand remained remarkably robust," said the IEA in its December report.

The deadlock in the U.S. budget talks is adding to downside pressures on crude prices as the $600 billion of automatic tax hikes and spending cuts that will take effect in January might push the economy into recession, darkening the outlook for oil demand.

Republicans in Congress hardened their resistance to President Barak Obama’s proposal, while lawmakers from both parties started said “it’s becoming less likely an agreement can be reached before the Christmas holiday” amid serious differences.

Crude also fell after the U.S. Energy Department reported a surge in stockpiles by 843,000 barrels although they were expected to declines 2.5 million. Gasoline stockpiles climbed 5 million barrels more than double the 2 million gain expected. Distillate rose 3 million barrels from an expected gain of 1.1 million.

Crude oil is trading as of this writing at $86.60 a barrel from the opening at $86.73, with the highest at $86.76 and the lowest at $76.37. Crude may also fall as some investors may take profit from yesterday’s rise above the $87.50.

Brent is trading around $109.34 a barrel after falling 0.15%. Natural gas is trading around $3.369 per 1,000 cubic feet after falling 0.38%. Gasoline is trading around $2.74 a barrel after falling from the highest $2.93. Heating oil is trading at $3.05.

Technically, crude oil bounced back from the resistance around $87.60, and now it faces a resistance at $86.80 which if breached it will head to the next target at $87.45. A support is found at $85.40 which if breached it will head towards the next target at $85.10.