"The ISM data took away the momentum, but crude hasn't lost that much ground," said Phil Flynn, analyst at Price Futures Group in Chicago. The weak US manufacturing data and the continuing uncertainty about negotiations on the US budget helped push Brent lower, pulled US crude well off its high and weighed on Wall Street equities prices.
Brent's more pronounced retreat was attributed to some unwinding of the spread between Brent and its US counterpart. Brent's premium to US crude fell below $22 a barrel on Monday. Oil had been lifted after readings from both official and private sector surveys of China's vast manufacturing sector showed activity picked up November, adding to evidence that economic growth in the No 2 oil consuming country is reviving after seven quarters of slowing growth.
Brent January crude fell 15 cents to $111.08 a barrel at 12:34 pm EST (1734 GMT), back below its 200-day moving average of $111.34 after reaching $112.33 in the session. US January crude, up a third straight session, rose 34 cents to $89.25 a barrel. Crude reached $90.33 before pulling back, having pushed above the November 19 intraday peak of $89.80, a level being monitored by chart watchers, according to traders and brokers.
Fuelling investor caution about demand for oil is the uncertainty about talks on mandated US tax hikes and spending cuts investors fear may pull the world's biggest economy back into recession.
But tensions in the Middle East continued to stoke fears about the potential for supply disruptions in the region and remained supportive to oil prices. The dollar index, measuring the US currency against a basket of currencies, weakened and the dollar extended losses versus the yen and euro after the disappointing ISM data. The euro and European shares received a lift from Spain's formal request for European funds to recapitalize Spain's ailing banking sector. A weaker dollar is usually supportive to dollar-denominated commodities like oil and copper. Monday's final reading of HSBC's China manufacturing Purchasing Managers' Survey (PMI) rose to 50.5 in November from 49.5 in October, the first time since October 2011 the headline number has topped the 50-point line that demarcates growth and contraction from the previous month.
The HSBC survey followed the release on Saturday of a survey from the National Bureau of Statistics showing the pace of growth in the manufacturing sector quickening. The official PMI rose to a seven-month high of 50.6 for November, from 50.2 in October. Investors will now await China's industrial output and trade data to be released later this month for further confirmation of revived growth.