Oil fell Tuesday as the dollar bounced up off its lows and investors turned cautious, taking profits on an early rise in crude futures to a 26-month peak above $90 a barrel.
After a deal struck by U.S. President Barack Obama with Republicans to extend Bush-era tax cuts helped boost U.S. equities and oil, uncertainty emerged about the plan's passage, pressuring oil prices.
Heating fuel demand stoked by cold weather in Europe and the United States helped lift crude oil prices, along with optimism that Ireland will pass an austerity budget, which boosted the euro against the dollar.
U.S. crude for January delivery fell 87 cents to $88.51 a barrel at 12:53 p.m. EST, having retreated from an earlier $90.76 peak, the highest intraday front-month price since October 2008.
ICE Brent crude for fell 65 cents to $90.80 a barrel, slipping from an early $92.86 peak.
"Crude pushed above $90, but lost momentum and the more nervous longs probably took a little profit," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
"The fundamentals are still not spectacular and that may make investors cautious. But if equities stay strong and the dollar weak, that may attract buyers back into crude,"
The euro surrendered early gains against the dollar as optimism about an Irish budget was overshadowed by broader worries about the European Union's ability to stem debt problems from spreading.
U.S. House of Representatives Majority Leader Steny Hoyer on Tuesday did not rule out backing the tax-cut deal negotiated by President Obama, but said he was undecided.
House Speaker Nancy Pelosi said talks with President Obama would continue in coming days, as Democrats balked at major components of a possible compromise bill.
"I think the tax deal was part of the rally early, but if questions remain about passage of the deal they could cause traders to give up on the long side," said Tom Bentz, broker at BNP Paribas Commodity Futures Inc in New York.
Also stoking investor caution was a report in an official newspaper saying that China's central bank may raise interest rates this weekend to emphasize its shift to a "prudent" monetary policy in the face of rising inflation.
COLD WEATHER LIFT
Temperatures in Europe's main heating hub of the northwest were expected to stay below seasonal norms over the next 10 days, according to private forecaster DTN Meteorlogix, boosting gas oil demand and prompting utilities to switch on oil-fired power plants.
Heating demand in the United States was expected to be 16.3 percent above normal in the week to Dec. 11, according to the U.S. National Weather Service.
"The market is reacting to the very cold weather in Europe and it's expecting to see an impact on heating oil ... it's a knee-jerk reaction," said Roy Jordan, oil analyst at Facts Global Energy.
News that German manufacturing orders rose in 1.6 percent in October added to support for oil.
Investors will watch weekly oil inventory reports for evidence that improving demand is helping lower bulging U.S. inventories.
U.S. crude oil stocks were expected to have fallen 1.5 million barrels last week and distillates by 400,000 barrels, according to a preliminary Reuters analyst survey on Monday.
The industry group the American Petroleum Institute's report is due for release on Tuesday at 4:30 p.m. EST , followed by government statistics from the Energy Information Administration Wednesday.
The Organization of the Petroleum Exporting Countries meets on Dec. 11, with oil ministers expected to keep existing supply targets.
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