Brent holds above $117; investors eye US debt deal

SINGAPORE: Oil was heading on Friday for its first monthly rise in three as investors focused on forecasts of improved demand despite jitters over an elusive debt deal in the United States to avert a default and a credit downgrade.

Prices also gained support from positive macroeconomic data from the United States on Wednesday and about 7 percent of output being shut in by producers in the Gulf of Mexico as Tropical Storm Don approaches.

Brent crude for September rose 3 cents to $117.39 a barrel by 0511 GMT after closing Thursday down 7 cents at $117.36 a barrel. US crude for September was down 37 cents at $97.07 a barrel, but was on track to rise 1.8 percent on the month, its first increase in three months.

A deal to avert an imminent and unprecedented debt default by the world's largest economy was nowhere in sight as Republican infighting further delays any compromise with Democrats.

"The population across the globe is getting fed up with the sabre-rattling," said Ben Le Brun, analyst at CMC Markets. "It's just a lot of uncertainty. Hopefully we'll see something during the weekend that will resolve this issue."

The head of the IMF and top officials at US banks have warned that a failure to raise the debt limit by the Aug. 2 deadline could trigger a payments crunch that would shake the global financial system, cause the dollar to decline and tip the United States back into recession.

The US Treasury will unveil a plan as soon as Friday evening showing how the government will function and pay its bills if it looks like Congress will not raise the debt ceiling in a timely manner.

Political wrangling over the debt issue overshadowed Thursday's data showing an improvement in US unemployment claims and home sales that briefly lifted markets.

"The biggest concern in the United States was the jobs market," Le Brun said, adding that the positive data could bring more good news on the US macroeconomic front.

"We do have a good backlog of economic data. I expect a significant rally across a number of asset classes once the debt issue is put to bed," he said.

Still, the Commerce Department will release later on Friday its first estimate of second-quarter GDP that will likely show the economy probably remained in a slow growth mode.

On Thursday, crude prices edged up after producers reduced oil and natural gas output in the Gulf of Mexico as Tropical Storm Don churned northwest toward the Texas coast.

The hurricane season from end-August to end-October "are of greater-than-normal concern due to low levels of spare capacity," J.P. Morgan analysts said in a note.

Shell chief executive Peter Voser told Reuters that oil prices remained strong because the market believed OPEC spare capacity was eroding fast and had probably fallen below 2 million barrels per day. This comes even as OPEC is expected to pump the most oil in almost three years in July.

Investors are bullish on oil prices as they expect demand to rise later in the second half of the year, tightening supply.

"The removal of policy uncertainty and the possibility for a more optimistic Chinese economic outcome and more recent indications that emerging market demand is picking up offer constructive signs for the fourth quarter," J.P. Morgan analysts said.

The Chinese central bank looked poised to end a streak of increases in bank reserve requirements every month since November as a slowdown in foreign capital inflows gives it room to relieve very tight money market conditions.

"Such a move could help maintain growth in both the economy and consumers' disposable income and should be favourable for oil from the demand side," MF Global analysts wrote in a note.

Copyright Reuters, 2011