US Oil steady above $99 as Obama urges compromise to avoid default

SINGAPORE: Oil prices held steady as President Barack Obama urged Republican and Democratic leaders to reach a fair compromise on raising the debt ceiling to avoid the first default in the history of the US

Obama warned that failure to act could cost jobs and do serious damage to the world's biggest economy. The US would not be able to pay bills that include monthly Social Security checks if the debt ceiling is not raised, and that may lead to a drop in energy consumption.

Brent crude was unchanged at $117.95 a barrel at 0330 GMT, after sliding as low as $117.32. US oil was 21 cents higher at $99.42, after earlier dipping to $98.80.

"Each side thinks the other will compromise and the clock is ticking," said Tony Nunan, a risk manager at Mitsubishi Corp. "If the clock keeps ticking and nothing gets done, people get worried."

A temporary six-month extension of the ceiling does not solve the problem and might not be enough to avoid credit downgrade, Obama also said.

Asian shares edged higher on Tuesday with investors showing few signs of panic even as the U.S has failed to bridge their differences with just a week to go to the Aug. 2 deadline to raise the debt ceiling.

Gold, which has rallied in the past few days hitting successive records as investors poured in to the safe asset, held steady below its all-time high on Tuesday.

"At the end of the day if the Republicans do not make any further move toward a bigger compromise, President Obama will simply have to sign the shorter-term deal to avoid a default," said David Cohen, director of Asian forecasting at Action Economics. "A default is still unlikely to happen."

STEADY DEMAND

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.

A lower 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 at the world's largest consumer.

Still, analysts expect that the world's top oil consumer US to reach an agreement soon and prices to recover, driven by expectations of steady demand amid reduced global output.

"By the end of this week we'll see a deal and the markets will recover," Nunan said.

Brent is poised to rise within a range of $116-$120 a barrel while US oil could trade sideways between $97 and $103 a barrel, he said.

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 weekly inventory data.

Mitsubishi's Nunan expects further drawdowns in oil inventories in the second half of this year as demand will hold up despite sluggish macroeconomic data.

Oil fell on Monday, with participants staying on the sidelines awaiting the outcome of US efforts to raise the debt ceiling. Both US and Brent total crude futures trading volumes were under 300,000 lots traded in afternoon trading in New York, with both more than 55 percent below their 30 day averages.

Copyright Reuters, 2011