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Oil below $87 as U.S. fiscal concerns drag on

The price of oil hovered below $87 a barrel Monday as uncertainty over a deal on the U.S. budget overshadowed expectations of economic stimulus in Japan and China.

By early afternoon in Europe, benchmark oil for January delivery was down 7 cents to $86.66 a barrel in electronic trading on the New York Mercantile Exchange. The contract ended up 84 cents Friday at $86.73.

In London, Brent crude was down 36 cents at $107.82 on the ICE Futures exchange.

Oil prices were kept in check by the lack of agreement in Washington on the U.S. budget, as concerns grew that tax increases and spending cuts that will take effect next year if no deal is reached will hinder economic growth and demand for crude.

Analysts, however, said that if the "fiscal cliff" can be avoided, commodities like oil could make gains.

"If U.S. fiscal cliff issues can be resolved soon, a strong and broad-based rally across commodities is possible, as investors are under-exposed," said a report from Barclays in London.

Meanwhile, hopes grew that Japan's new government would offer stimulus to boost growth. Weekend elections delivered a resounding victory to the Liberal Democratic Party, returning it to power after a three-year hiatus. Leader Shinzo Abe has called for aggressive steps to break Japan out of its 20-year economic decline.

In China, new Communist Party leaders are promising reforms aimed at reducing reliance on exports and more spending, if needed, to prop up a shaky economic recovery. In the first statement of their economic goals since taking power in November, the new party leaders pledged continuity Sunday with long-term plans aimed at nurturing self-sustaining growth and raising income.

In other energy futures trading on Nymex:

- Wholesale gasoline was down 0.23 cent to $2.6585 a gallon.

- Heating oil retreated 0.42 cent to $2.9727 a gallon.

- Natural gas added 4.4 cents to $3.358 per 1,000 cubic feet.

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