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Oil edges higher on Eurozone rescue plan

business Updated: Jul 21, 2011 18:56 IST

Oil prices edged higher on Thursday after draft EU summit conclusions eased anxiety about the European debt crisis and offset the impact of weak economic data from China, the world's second-biggest oil user.

Comment to Reuters from International Energy Agency director Nobuo Tanaka that there was unlikely to be another release for now from emergency stockpiles was already factored in, traders said.

Brent was 15 cents higher at $118.30, off a session low of $116.62, while US crude was 34 cents higher at $98.74 by 1246 GMT, up from a low of $97.20.

The European debt crisis has a limited direct bearing on oil demand as consumption growth is concentrated in emerging economies, but it still could have knock-on effects, analysts said.

"Export markets would be affected if it all goes pear-shaped. It could take a little bit of the heat out of the demand side of the balance," said Neil Atkinson of Datamonitor.

Draft conclusions of an EU summit called to tackle Europe's mounting deficit showed the euro zone bailout fund would provide loans to Greece, Ireland and Portugal at a lower interest rate and with longer maturity dates.

During the Asian trading day, HSBC flash PMI showed China's factory sector had shrunk.

The earliest available indicator of industrial activity in China, it fell to 48.9 in July, its lowest since March 2009, as monetary policy tightening and slack global demand weighed on the economy. The index was last below 50 in July 2010.

Any sign of a slowdown in China is particularly closely watched by commodity markets, which are focused on Asia and particularly China as the prime source of future demand.

In the world's biggest oil consumer, the United States, the White House signalled it could support a short-term increase in the US borrowing limit for "a few days" if lawmakers agreed to a broad deficit reduction deal but needed more time to pass it.

A shift from President Barack Obama's previous position, the mooted plan reflects the lack of time for Congress to pass a massive deficit-cutting deal before the United States runs out of money on Aug. 2.

The International Energy Agency gave itself 30 days -- a deadline that expires at the end of this week -- to review the impact of that release.

Its emergency reserves release followed the failure of OPEC in June to agree on a Saudi-led proposal to increase supplies.

In defiance of the Organization of the Petroleum Exporting Countries as a whole, Saudi Arabia unilaterally increased its supplies. They climbed to around 9.8 million bpd in June, a senior OPEC delegate said, and Tanaka predicted they would rise to 10 million bpd in July.

US inventories fell by more than expected last week, according to data released on Wednesday.

But analysts said stocks were still comfortable and the release of high-quality crude following last month's reserves announcement had helped to redress the market balance and narrow a price gap between cheaper, difficult-to-refine grades and higher quality oil.

Overall the price of Brent is still around $4 higher than before the IEA's June 23 announcement and less than $10 shy of a high for the year of more than $127 touched in April.