Oil prices fell more than 1 percent on Friday, eroding this week's earlier gains after Republican lawmakers in the United States withheld support for a proposal to avert the so-called fiscal cliff.
Fears that a budget deal will not be reached before the end of the year, coupled with downbeat data on consumer morale in the United States and Germany, fuelled selling across riskier asset classes including stocks and oil. The dollar gained on safe haven flows, adding more pressure to crude.
The Republicans late on Thursday abandoned their own proposed solution, championed by House of Representatives Speaker John Boehner, to head off $600 billion worth of tax increases and spending cuts that investors fear could push the U.S. economy into recession next year.
Efforts to avert that outcome were in disarray by Friday afternoon, with lawmakers leaving Washington for the holidays.
"The energy complex was swept up in a broad-based liquidation phase that mainly spun off of another snag in fiscal cliff negotiations," said Jim Ritterbusch, president of Chicago-based Ritterbusch & Associates.
Brent February crude fell $1.23 or 1.1 percent to settle at $108.97 a barrel. The most-active contract has failed for the past three days to stay above the 200-day moving average at $110.24 a barrel.
U.S. February crude fell $1.47 or 1.6 percent, as the fading fiscal cliff hopes hit it harder than Brent.
The slide erased weekly gains in London's Brent crude market, which had risen earlier on Middle East instability and expectations for revived growth in China. U.S. crude rose 2.2 percent on the week, its best gain in two months.
VOLUME THIN, SENTIMENT EBBS
Sharp price swings have been aided by thin volumes ahead of end-of-year holiday's next week, traders and brokers said. Turnover was 50 percent below the 30-day averages for Brent and U.S. crude futures at midday in New York.
U.S. RBOB gasoline and heating oil futures also fell, with heating oil feeling pressure from seasonally mild weather.
A drop in consumer sentiment in December, as the budget talks dragged on, added pressure on oil futures on Friday.
The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment tumbled to 72.9 from 82.7 in November, worse than forecasts for a reading of 74.7 and the lowest since July.
Analysts are more positive on the prospects for the oil market in the New Year, following Chinese data showing higher demand and on expectations of slightly faster global economic growth.
World oil demand growth looks set to rise in 2013 due to a recovery in the U.S. economy, according to many forecasters.
The U.S. economy grew faster than previously thought, at a 3.1 percent annual rate in the third quarter, the Commerce Department said. It was the fastest pace since late 2011 and more than double the second quarter's 1.3 percent rate.