Oil slipped on Tuesday, retracing part of the sharp gains seen in the previous  session, while traders awaited further evidence that  inventories were draining amid hopes of a surge in demand for  heating in sight.

Prices climbed 2.4 per cent on Monday, led by futures of  heating fuels including gas oil, as cold weather gripped  northern Europe and the US Northeast, raising expectations  of higher consumption.

US crude for January fell 51 cents to $85.22 a barrel at at 0346 GMT after rising $1.97 on Monday, when it  briefly touched $85.90, the highest price since Nov. 12.  Prices reached a 25-month high of $88.63 on Nov. 11.

ICE Brent slipped 41 cents to $86.93 after rising  more than 2 per cent on Monday, when it shrugged off doubts  that Ireland's financial bailout would prevent other euro zone  crisis.

'Investors are in a wait-and-see attitude, holding for  some positive news to boost prices further,' said Serene Lim,  a Singapore-based oil analyst at ANZ.

'The reason for yesterday's bullishness besides the  Ireland bailout was the cold weather in Europe. Prices were  actually boosted by fundamentals, rather than macro factors.”

The euro held near a two-month low on Tuesday and major  stock indexes edged lower as fears that Ireland's fiscal  problems could spread to more euro zone countries weighed on  investor sentiment.

US crude oil inventories probably fell by 400,000  barrels last week as imports dipped, a Reuters poll of  analysts showed, but analysts were divided with an equal  number of them predicting a decline and an increase.

'You have to be cautious because typically at the end of  the year inventories tend to come off because of tax  purposes,' Lim said. 'Refiners would tend to offload their  inventories to offshore.”

Stockpiles of distillates including heating oil and diesel  probably fell for a tenth consecutive week, shedding 900,000  barrels last week, the poll showed, while gasoline inventories  probably climbed 1.2 million barrels.

An industry report on inventories from the American  Petroleum Institutes (API) was due on Tuesday at 2130 GMT,  followed by government statistics from the Energy Information  Administration on Wednesday.

Cold temperatures in Northeast and northwestern Europe  provided a boost to London gas oil  and US heating  oil distillate futures on Monday as the US December  refined products contracts neared their Tuesday  expiration.

Factory output in Japan, the world's third-largest oil  user, fell in October by the most since February 2009, as  slowing exports and the diminishing effects of stimulus-driven  consumption cloud the outlook for the fragile economic  recovery.

A Reuters oil poll showed most analysts revising price  estimates higher, while a Reuters survey of OPEC showed  slightly better compliance with production target  limits.

OPEC president Ecuador joined a number of other oil  producers on Monday in signaling tolerance for higher prices,  saying crude could rise to $90 a barrel without endangering  the world economy if growth picks up.

Secretive North Korea detailed for the first time its  expanded nuclear programme on Tuesday, saying it had thousands  of centrifuges as pressure built on China to rein in its ally  amid heightened tensions on the peninsula. – Reuters