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  • July 26th, 2011

Oil Rises as Obama Urges Compromise to Avoid Default

Oil prices rose on Tuesday as President Barack Obama urged Republican and Democratic leaders to reach a fair compromise on raising the United States’s debt ceiling to avoid the first default in the country’s history.

Obama warned that failure to act could cost jobs and do serious damage to the world’s biggest economy.

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

London Brent crude rose 14 cents to $118.08 a barrel by 0500 GMT, after sliding as low as $117.32.

U.S. light sweet crude was 38 cents higher at $99.58, after earlier dipping to $98.80.

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

“The market is pretty much convinced that some form of stimulus will come out of the negotiations and we can view this as being bullish for oil,” said Jonathan Barratt, managing director of Commodity Broking Services.

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 lawmakers’ 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.

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.

An unprecedented downgrade of America’s gold-plated credit rating could raise borrowing costs not only for the U.S. government but also for other countries, companies and consumers because U.S. 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.

Brent is poised to rise within a range of $116 to $120 a barrel while U.S. 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.

U.S. 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.

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 U.S. efforts to raise the debt ceiling.

Both U.S. 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.


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