The Fed’s Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday, and investors are hoping for a better sense of when it may start to reduce its $85 billion-a-month bond-buying programme.
A cut in its stimulus would boost the dollar, weighing on dollar-denominated commodities, including oil.
“I think it’s going to be difficult now to take big positions ahead of the FOMC meeting,” Petromatrix analyst Oliver Jakob was quoted by Reuters as saying.
Brent futures for January traded 77 cents down at $108.64 by 1030 GMT, after settling $1.64 higher on Monday, its biggest daily gain in two weeks. US crude oil futures dropped 22 cents to $97.26, after ending 88 cents higher.
Prices were boosted in the previous session on news that Libya had not reopened several oil-exporting ports, keeping several hundred thousand barrels per day (bpd) of high-quality light crude off the market.
Data on Monday showed global manufacturing and business activity expanded in December as eurozone businesses ended the year on a high thanks to a surge in new orders, also supporting prices.
The December PMI reading for Europe was the second-highest since mid-2011 and beat the median forecast in a Reuters poll.
US manufacturing output rose for a fourth straight month in November, adding to solid reports on retail sales and employment that have painted an upbeat picture of the world’s biggest economy.
The spate of positive numbers from the US is convincing some investors the Fed may announce a tapering on Wednesday, after its two-day meeting. Others expect it to wait for more evidence of a lasting recovery before tapering.
The market is looking to inflation data in the US that will come out at 1330 GMT for a further indication on what the Fed’s decision on tapering might be.
“The US Consumer Price Index (CPI) will be an important part of the Fed’s decision about a possible tapering,” said Bjarne Schieldrop, chief commodity analyst at SEB Bank.
“So the CPI is probably the highlight of the day in terms of the overall tapering focus in the market.”
Investors are also awaiting data on US crude stockpiles to gauge the demand outlook for the world’s biggest oil consumer. Commercial crude inventories fell an average of 3.6 million barrels last week because of declining imports, a preliminary Reuters poll of analysts showed.