Oil gains on US debt hopes, tight supply

LONDON: Oil rose a dollar on Wednesday, bolstered by hopes of a US debt deal and by tightening crude stocks in the world's largest oil consumer.

US crude, rose $1.00 to $98.50 a barrel, having reached a high of $98.60.

Brent crude climbed 88 cents to $117.94 a barrel by 0828 GMT after touching a peak of $118.25, adding to gains of more than a dollar in the previous session.

"The outlook for US inventories data is pushing prices higher after a big draw in crude shown by the API, which has shifted the outlook for EIA data," said Andy Sommer, energy analyst at EGL in Dietikon, Switzerland.

Industry group American Petroleum Institute on Tuesday reported a 5.2 million barrel drop in domestic crude stocks, surpassing expectations for a 1.7 million barrel fall, as refinery runs rose.

The US Energy Information Administration will issue its own weekly data later on Wednesday.

Stockpiles were forecast down for a seventh straight week due to higher refinery usage and a decline in imports, an extended Reuters poll showed on Tuesday ahead of weekly inventory reports.

All but one of 14 analysts polled projected a drawdown in crude, with the average forecast at 1.7 million barrels for the week to July 15.

Sommer added that investors were now positioned for a big fall in stocks, which would make oil prices vulnerable if the data, which can swing sharply due to its weekly frequency, fails to meet forecasts for a big drop.

DEBT HOPES

Also helping lift oil prices were hopes that debt problems on both sides of the Atlantic could be resolved.

A group of Democratic and Republican senators offered an ambitious plan on Tuesday that could revive stalled US debt talks and the prospect of a long-term deficit reduction deal to avert a default by the United States.

With just two weeks left until the federal government runs out of money to pay all of its bills, President Barack Obama seized on the plan by the so-called Gang of Six as a "very significant step" and urged congressional leaders to start discussing it.

On the other side of the Atlantic, German Chancellor Angela Merkel doused expectations of any comprehensive solution to Greece's debt crisis at an emergency euro zone summit on Thursday, saying "further steps will be necessary and not just one spectacular event which solves everything".

The euro eased against the dollar, dogged by lingering doubts over whether the summit will quell investors fears of contagion risks from Greece's sovereign debt crisis.

"While in the short-term, all eyes are on relative currency shifts, the economic fallout from an ineffective deal in either country is the real market risk issue," said analysts at J.P. Morgan in a research note.

Oil has been supported in recent days by a growing conviction that the International Energy Agency will not tap into more of its emergency reserves after its decision to release 60 million barrels from emergency stockpiles last month.

The IEA's release took energy traders by surprise and briefly rattled oil markets.

IEA's executive director said the agency has yet to decide whether another release from emergency stocks is needed, although the French energy minister said there were no plans for another release.

Analysts suspect the shock action may have contributed to the massive drop in second-quarter trading profits reported by Goldman Sachs, long known as a large and savvy commodity derivatives trader.

Goldman said on Tuesday it had "significantly lower results" in its commodities and mortgage businesses, even after its own analysts correctly called for a pull-back in prices.

COPYRIGHT REUTERS, 2011