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Mon 1 Aug 2011 09:03 AM

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Oil climbs more than $1 as US reaches debt deal

US congressional agreement improves prospects for oil demand from world's top consumer

Oil climbs more than $1 as US reaches debt deal

Crude climbed more than $1 on Monday, sending Brent above
$118, after US President Barack Obama said congressional leaders agreed on a
debt deal to avert default, improving the prospects for oil demand from the
world's top consumer.

Obama urged both Democratic and Republican lawmakers to
support the deal, which was likely to be voted on Monday. The agreement brightens
the outlook for energy use as it may help keep the fragile US economic recovery
on track.

Brent crude advanced $1.50 to $118.24 a barrel by 0416
GMT, rebounding from an almost two-week low hit in the previous session. Brent
is less than $9 from this year's peak above $127, while US crude gained $1.45
to $97.15.

"The market is cautiously optimistic, so we could
potentially see a euphoric rally," said Jonathan Barratt, managing
director at Commodity Broking Services in Sydney.

"The initial reaction is that it will act as a
stimulus because more money will be put into the economy. The flipside is how
long that will last, and concerns about how spending will be cut in the longer
term. It's a double-edged sword."

The White House said the compromise would cut about $2.5
trillion from the deficit over the next 10 years, but the reductions in
spending would not happen so quickly that they would drag on the fragile US
economy.

Equities rose while gold and the yen dropped, with
investors cutting safety trades after Washington reached the last minute deal
to escape default, though the top US credit rating could still be downgraded.

Oil prices tumbled on Friday following data showing the US
economy grew a slower-than-expected 1.3 percent in the second quarter.

The prospect of a US debt default has left a cloud over
businesses already reeling from the economy's tepid performance, and is likely
to have left them reluctant to ramp up hiring in July.

"Oil is dependent on the US economy. GDP was a very
weak number, and I don't think that's going to change any time soon," said
Victor Say, an analyst at Informa Global Markets in Singapore.

"All the numbers are telling you that consumer
sentiment is turning down, which means consumption is going to slow down."

Two other reports on Friday showed business activity in
the US Midwest grew less than expected last month as the labor market weakened,
while US consumer sentiment fell in July to its lowest point in more than two
years.

Economic growth is also slowing in China, the world's
second-largest oil consumer. The country's official purchasing managers' index
(PMI) dipped to 50.7 in July from June's 50.9, data showed on Monday.

China's factory sector struggled with its weakest activity
in 28 months in July as manufacturers grappled with a credit shortage and
softening global demand.

"PMI's are coming out very weak. The fact is that
China's is in a downtrend, and with the US also heading lower, I don't expect
oil prices to go higher," Say said.

"You are going to see more weakness with the
stimulus out of the way, so there is really nothing much to push the
economy," Say said, adding he expected US crude to fall toward $80 a
barrel this year.

But at least until last week, investors were expecting
prices to climb.

Money managers raised net long US crude futures and
options positions in the week to Tuesday. Bets that prices will rise posted a
sharp increase in the Intercontinental Exchange's look-a-like US crude
contract, the US Commodity Futures Trading Commission said.

The US National Hurricane Center sees a near 100 percent
probability that a low-pressure area heading from the Atlantic Ocean into the
Caribbean will become a tropical cyclone over the next two days, keeping the
hurricane season in traders' minds.

Last week, Tropical Storm Don shut nearly 12 percent of US
Gulf of Mexico crude output as it headed toward the Texas coast.

The US Bureau of Ocean Energy Management said 6 percent
of the Gulf's oil output remained shut on Sunday, down from 10.9 percent on
Saturday.

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