* API data shows 12 million barrel crude drop
* Eyes on bigger U.S. budget battles
* Upbeat China data lifts demand outlook, limits losses
* Coming up: US EIA inventory data on Friday
(Updates with API data)
By Matthew Robinson and Robert Gibbons
NEW YORK, Jan 3 Oil slipped on Thursday, after
prices hit 11-week highs, on worries about looming U.S. budget
battles and signs of growing concern by the U.S. Federal Reserve
about buying bonds to spur economic growth.
Focus shifted from the "fiscal-cliff" deal reached earlier
this week to the upcoming wrangling U.S. President Barack Obama
and Republicans in Congress will face over the budget, which
could further stress the world's biggest economy.
The oil markets have been closely watching the U.S. budget
crisis, as well as ongoing problems in the euro zone, for signs
of further dampening in fuel demand.
Brent crude jumped over $112 a barrel for the first time
since mid-October on Wednesday after the budget deal was
reached, but players said the market was awaiting strong signs
that the economy was improving to extend the rally longer term.
"The uncertainty because of the budget cuts and the ceiling
debate s eems to have tempered the m arkets' e nthusiasm that
things were getting better and that's why things have stalled,"
said Gene McGillian, an analyst at Tradition Energy in Stamford,
"I think we probably have more to go on the rally but a
significant rally from here has to come from signs the economy
is really improving," he added.
Prices fell further in a wider sell off of risk assets,
including equities, in U.S. afternoon trade after the Federal
Open Market Committee's December minutes showed rising concern
about the risks of the Fed's policy of buying bonds to stimulate
Brent crude settled 33 cents lower at $112.14 a
barrel after rising more than 1 percent on Wednesday to settle
at their highest level since October. U.S. crude fell 20
cents to settle at $92.92 a barrel, erasing smaller gains from
earlier in the day after the Fed minutes were released.
Brent's premium to U.S. crude narrowed, in part due to news
a major expansion of the Seaway pipeline -- aimed at easing the
bottleneck at the Cushing, Oklahoma oil hub which has depressed
U.S. prices -- should be at full rates by the end of next week.
The spread between Brent and West Texas Intermediate
CL-LCO1=R narrowed to just over $19 a barrel on Thursday, down
from 2012 highs of about $26.
Brent trading volumes were healthy, about 17 percent above
the 30-day moving average, while U.S. crude trade was about
average for that period.
EYES ON ECONOMIC, INVENTORY DATA
Data from the American Petroleum Institute, released on
Thursday after the settlement, showed crude oil inventories
tumbled by 12 million barrels last week, led by declines in the
Gulf Coast, where refiners typically draw down stocks for end of
the year accounting purposes.
Imports of crude oil fell by 845,000 barrels per day (bpd)
to 7.43 million bpd in the week to Dec. 28, API data showed.
"This Gulf Coast draw could be to do with holding off ships
for the end of the year," said Phil Flynn of at Price Futures
Group in Chicago.
"There could be some end of year tinkering here for tax
reasons with a shipment or two taking their sweet time to get to
the Gulf," Flynn said.
Gasoline and distillate stockpiles showed
steeper-than-expected builds, according to the API report, which
was delayed from its normal Tuesday release by the New Year's
Traders will now await data from the U.S. government's
Energy Information Administration (EIA), due out on Friday
instead of the normal Wednesday release, for confirmation of the
Other U.S. economic data released Thursday was mixed, with
U.S. private-sector employment data coming in stronger than
expected. A separate report showed the number of Americans
filing new claims for unemployment benefits rose last wee, and
traders will now be closely watching out for payrolls data
coming out on Friday.
Data also showed the service sector of No.2 oil consumer
China expanded in December, fueling hopes that the world's
second-largest economy and top energy consumer is recovering.
(Reporting by Matthew Robinson and Robert Gibbons in New York;
Peg Mackey in London; Florence Tan in Singapore; Editing by
Marguerita Choy, Alden Bentley and Leslie Gevirtz)