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Markets

Oil supported by weak dollar, US debt tussle

LONDON : Oil prices rose on Tuesday, bolstered by dollar weakness as a political tussle on raising the US debt ceiling
Published July 26, 2011

 LONDON: Oil prices rose on Tuesday, bolstered by dollar weakness as a political tussle on raising the US debt ceiling persisted, though investors shrugged off fears that a US default would undermine the appetite for riskier assets.

US crude oil was 49 cents higher at $99.69 a barrel by 1036 GMT after earlier touching a high of $99.78. Brent crude was up 36 cents at $118.28 a barrel, retreating from the day's high of $118.60.

The index of the dollar against a basket of currencies was down 0.58 percent. The dollar also hit another all-time low against the Swiss franc , though it recovered slightly in European morning trade.

A weaker dollar boosts oil, priced in the US currency, as it makes it more attractive to holders of other currencies.

President Barack Obama urged Republican and Democratic leaders to reach a fair compromise on raising the US debt ceiling to avoid default, warning that failure to act could cost jobs and do serious damage to the world's biggest economy.

"There is a political circus, and everyone is saying it could be a disaster if the ceiling is not raised, but the market is not pricing in any catastrophic potential," said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.

If the debt ceiling is not raised, the US would not be able to pay bills that include monthly Social Security checks, which may lead to a drop in energy consumption.

Still, analysts expect the United States to reach an agreement soon and prices to recover, driven by expectations of steady demand amid reduced global output.

Weighing on assets perceived as sensitive to decreasing risk appetite and keeping oil gains in check, Italy's debt auction results showed rising yields, signalling mounting pressure on the country's finances.

Jakob at Petromatrix pointed to thin volumes and entrenched ranges, with Brent crude hemmed in between its 100-day moving average of $116.50 and the psychological level of $120 and US crude seeing resistance at the $100 per barrel level.

DISMAL DATA SHRUGGED OFF

Oil and other assets such as base metals and equities that tend to reflect the demand outlook were robust in the face of grim economic data.

German consumer sentiment fell more than expected in August to a 10-month low on worries over the Greek debt crisis and high energy prices, a survey showed

The UK's second-quarter GDP data showed that the economy barely grew.

In the United States, ratings agencies have warned that even if Congress raises the debt ceiling and averts a default, they may still strip the United States of its AAA credit rating if lawmakers fail to agree on deeper long-term budget cuts.

An unprecedented downgrade of America's gold-plated credit rating could raise borrowing costs, not only for the US government but also for other countries, companies and consumers because US Treasuries are the benchmark by which many loans are measured.

Failure to act on the debt limit could push the United States back into recession and hurt oil demand in the world's largest consumer.

But an agreement will be struck soon and prices will recover, one analyst said.

"By the end of this week we'll see a deal and the markets will recover," said Tony Nunan, a risk manager at Mitsubishi Corp.

Investors will watch weekly oil stocks data from the American Petroleum Institute due later on Tuesday to gauge the country's demand following disappointing macroeconomic data that showed a slowdown in the nation's recovery.

US crude oil inventories were forecast to have fallen for the eighth straight week last week as the import level is likely to have leveled off, a preliminary Reuters poll showed ahead of the data.

Nunan expects further drawdowns in oil inventories in the second half of this year as demand holds up despite sluggish economic data.

Crude fell on Monday but both US and Brent total crude futures trading volumes were under 300,000 lots in afternoon trading in New York, with both more than 55 percent below their 30-day averages.

 

Copyright Reuters, 2011

 

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