Fiscal Cliff Weighs on Brent Prices

 
on December 05 2012 8:42 AM

Despite ongoing tension in the Middle East, Brent crude oil prices fell on Tuesday after concern about the future of the U.S. economy proved to be the biggest factor weighing on investors' minds. The commodity traded at $110.20 on Wednesday, recovering slightly after losses from the previous day.

The looming “fiscal cliff” has put the market on edge, as President Barack Obama squares off with Republican opponents within the U.S. government over a solution to the country's deficit. The president, who made statements in November claiming the negotiations would finish before Christmas, has proposed a tax increase to the wealthy that the Republicans strongly oppose.

While the two parties continue to struggle toward a compromise, the “cliff” is drawing nearer. If they do not agree before January 1, a $600 billion dollar bundle of tax increases and spending cuts forecast to tip the country into recession will kick in.

The uncertainty about an agreement coupled with this week's poor manufacturing data has caused investors to doubt future consumption in the U.S.

Tension between the U.S. and Iraq has underpinned Brent prices following the U.S. government's approval of new sanctions on Iraq's energy and shipping sectors. The U.S. is hopeful that the sanctions will cut some of the funding to Iraq's controversial nuclear development program and put an end to fear that the country is developing a nuclear bomb.

According to CNBC, the relationship between U.S. and Iraq was under more pressure on Tuesday as Iraqi officials claim to have captured a US intelligence drone flying in their airspace. However, the White House has not confirmed this claim.

Crude inventory reports have also lent support to the commodity, as the data has shown a steep drop in inventory since November's original estimates. The Energy Information Administration is expected to release new weekly data on Wednesday afternoon.

 

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