(REUTERS) -- Brent crude slipped below $110 on Wednesday as recession fears, partly rekindled by stalled Greek debt talks, weighed on the outlook for demand, while threats by Iran to respond to European sanctions by shutting a vital trade route supported prices.
The failure of debt talks in Greece to reach a deal continued to dominate sentiment despite positive economic news from Germany on Wednesday and from the United States late on Tuesday.
Front-month Brent crude fell 16 cents to $109.87 a barrel at 5:12 a.m. ET. U.S. crude was down 70 cents at $98.25 a barrel, after settling below the 50-day moving average of $99.19.
The focus at the moment is on the demand side. For the moment we haven't had any supply disruptions, just fears or threats that this may happen, but it didn't happen so far. We have an oversupply at the moment, said Carsten Fritsch, a commodities analyst at Commerzbank.
Losses were limited by persistent worries about Iran after its politicians reiterated threats to close the Strait of Hormuz if the West succeeds in cutting off its oil exports, a vital source of revenue to Tehran.
The issues revolving around Iran are probably going to keep things reasonably stable in the near future said Tony Machacek, an energy broker at Bache Commodities.
A gloomy outlook for the euro zone dominated market sentiment, meanwhile, as finance ministers rejected a proposal by bondholders, keeping a deal key to averting a Greek default out of reach.
Positive signals from the euro zone emerged from Germany, where business sentiment rose for the third month in a row in January, beating expectations but doing little to raise spirits in the region.
The world's top oil consumer, the United States, also appeared to have shaken off the gloom as economists estimated its gross domestic product grew at a 3.0 percent annual pace in October-December, a median Reuters poll showed.
But Britain disappointed, with output contracting for the first time in a year, official data showed on Wednesday. The British finance minister blamed the euro zone crisis for a larger-than-expected 0.2 percent contraction in Britain's economy. Concerns grew that Britain may be entering recession.
On Tuesday, the International Monetary Fund said Europe's debt crisis could tip the world economy into recession and a bigger firewall was urgently needed to keep the damage from spreading.
For a 24-hr technical outlook on Brent: here
Graphic on Japan, China, India's oil imports from Iran: link.reuters.com/saf26s
On the supply side, a disruption in oil supply from South Sudan neared resolution after its landlocked government signed a deal with Kenya to build a pipeline to connect its oil fields with the Kenyan port of Lamu.
South Sudan seceded from Sudan in July under a 2005 peace deal that ended decades of civil war, but the two countries have remained at loggerheads over issues including oil, debt and fighting along the poorly drawn border.
Oil market losses widened after an unexpected jump in U.S. crude stockpiles. Industry data showed inventories rose 7.3 million barrels in the week to January 20, well over analysts' expectations for a build of 800,000 barrels.
The federal Energy Information Administration will follow with its inventory report on Wednesday at 10:30 a.m. EST.
Oil investors are also awaiting results of the U.S. Federal Reserve's two-day policy meeting, the first of 2012.
The Fed, which will start a new practice of announcing policymakers' interest-rate projections, will probably conclude the meeting with a signal that interest rates will be held near zero into 2014, according to a Reuters poll.