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LONDON, Nov 28 AFP

November 29 2012, 04:12AM

Oil prices have fallen as investors focus on key budget talks in the United States, the world's biggest consumer of energy, and react to news of an unexpected drop in US crude inventories.

New York's main contract, West Texas Intermediate (WTI) for delivery in January, slid $1.10 to $US86.08 ($A82.81) a barrel.

Brent North Sea crude for January shed $1.07 to $108.80 a barrel in late London deals.

"Following the agreement to provide further financial assistance to Greece, market players are clearly turning their attention to the next pressing problem, namely the budget dispute in the US," said Commerzbank oil analyst Carsten Fritsch.

US MPs are working to hammer out an agreement on the budget for next year that requires painful compromises from both Republicans and Democrats, but negotiations have been marked by bitter political bickering.

If no deal is reached before the end of the year, a "fiscal cliff" of tax rises and massive spending cuts, including slashes to the military, comes into effect and would likely send the world's biggest economy back into recession.

Ahead of any deal, the US Department of Energy on Wednesday announced that the country's crude stockpiles dropped by 300,000 barrels last week, confounding analyst expectations for a rise.

Initial euphoria over the debt deal reached between Greece and its creditors has meanwhile died down as both sides move to implement its terms.

Lingering concerns over the eurozone debt crisis cut short a rally by the euro, which briefly got a boost from the Greek debt deal announced on Tuesday.

A weaker euro makes dollar-priced oil more expensive, denting demand.

"As markets cautiously greeted news of a deal to release emergency aid to debt-laden Greece, oil traders eyed the looming US 'fiscal cliff' as the latest sign struggling fuel demand could face further headwinds," Phillip Futures said in a market commentary.