RTRS:Oil climbs more than $1 as U.S. reaches debt agreement
(Reuters) - Crude climbed more than $1 on Monday, sending Brent above $118, after U.S. President Barack Obama said congressional leaders agreed on a debt deal to avert default, improving the prospects for oil demand from the world's top consumer.
Obama urged both Democratic and Republican lawmakers to support the deal, which was likely to be voted on Monday. The agreement brightens the outlook for energy use as it may help keep the fragile U.S. economic recovery on track.
Brent crude advanced $1.50 to $118.24 a barrel by 0416 GMT, rebounding from an almost two-week low hit in the previous session. Brent is less than $9 from this year's peak above $127, while U.S. crude gained $1.45 to $97.15.
"The market is cautiously optimistic, so we could potentially see a euphoric rally," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.
"The initial reaction is that it will act as a stimulus because more money will be put into the economy. The flipside is how long that will last, and concerns about how spending will be cut in the longer term. It's a double-edged sword."
The White House said the compromise would cut about $2.5 trillion from the deficit over the next 10 years, but the reductions in spending would not happen so quickly that they would drag on the fragile U.S. economy.
Equities rose while gold and the yen dropped, with investors cutting safety trades after Washington reached the last minute deal to escape default, though the top U.S. credit rating could still be downgraded.
Oil prices tumbled on Friday following data showing the U.S. economy grew a slower-than-expected 1.3 percent in the second quarter.
The prospect of a U.S. debt default has left a cloud over businesses already reeling from the economy's tepid performance, and is likely to have left them reluctant to ramp up hiring in July.
"Oil is dependent on the U.S. economy. GDP was a very weak number, and I don't think that's going to change any time soon," said Victor Say, an analyst at Informa Global Markets in Singapore.
"All the numbers are telling you that consumer sentiment is turning down, which means consumption is going to slow down."
Two other reports on Friday showed business activity in the U.S. Midwest grew less than expected last month as the labour market weakened, while U.S. consumer sentiment fell in July to its lowest point in more than two years.
CHINA SLOWING
Economic growth is also slowing in China, the world's second-largest oil consumer. The country's official purchasing managers' index (PMI) dipped to 50.7 in July from June's 50.9, data showed on Monday.
China's factory sector struggled with its weakest activity in 28 months in July as manufacturers grappled with a credit shortage and softening global demand.
"PMI's are coming out very weak. The fact is that China's is in a downtrend, and with the U.S. also heading lower, I don't expect oil prices to go higher," Say said.
"You are going to see more weakness with the stimulus out of the way, so there is really nothing much to push the economy," Say said, adding he expected U.S. crude to fall towards $80 a barrel this year.
But at least until last week, investors were expecting prices to climb.
Money managers raised net long U.S. crude futures and options positions in the week to Tuesday. Bets that prices will rise posted a sharp increase in the Intercontinental Exchange's look-a-like U.S. crude contract, the U.S. Commodity Futures Trading Commission said.
The U.S. National Hurricane Center sees a near 100 percent probability that a low-pressure area heading from the Atlantic Ocean into the Caribbean will become a tropical cyclone over the next two days, keeping the hurricane season in traders' minds.
Last week, Tropical Storm Don shut nearly 12 percent of U.S. Gulf of Mexico crude output as it headed towards the Texas coast.
The U.S. Bureau of Ocean Energy Management said 6 percent of the Gulf's oil output remained shut on Sunday, down from 10.9 percent on Saturday.
