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Oil rises as recession fears recede

business Updated: Aug 15, 2011 20:00 IST

Oil prices rose on Monday as economic data helped ease concerns over a looming recession, but investors worried over the euro zone debt crisis and the outlook for global growth.

Stock markets rallied and safe haven assets such as gold, the dollar and the Swiss franc all fell after last's week's wild swings.

But analysts were cautious over the state of global oil demand and awaited first indications from the euro zone on second-quarter economic growth due on Tuesday at 0900 GMT.

Euro zone industrial output posted a surprise decline in June, boding poorly for second-quarter gross domestic product, which is forecast to have expanded by just 0.3 % compared with the first quarter.

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Paris on Tuesday to hammer out a solution to the debt crisis which threatens to engulf the economies of Italy and Spain and has heightened strains in money markets to levels not seen during the 2008 crisis.

North Sea Brent crude oil futures for September rose 75 cents to $108.78 by 1330 GMT, after dipping earlier to $107.40. US crude was up $1.00 at $86.38 a barrel. Both crude oil benchmarks recorded their third straight weekly loss in volatile trading last week, as a downgrade of US credit worthiness by ratings agency Standard & Poor's and fears that France might suffer the same fate sparked selling.

"It is much too early to call this a bottom to the market," said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. "But losses have been so substantial, even with the recovery last week, that I wouldn't be surprised if we saw some recovery in the short-term. It will be very difficult to surprise the market to the downside," Weinberg added.

While weak data out of the United States or Europe this week could send markets down again, the bar for disappointment has been set higher after last week's turmoil.

Ben Westmore, commodities analyst at National Australia Bank, said a lot of bad news had already been priced in and there was some expectation weakness would not be sustained: "At these levels, oil looks cheap and we could see some buying activity," Westmore said.

Investors were heartened by several sets of data suggesting the developed economies may not be slowing as much as feared. US retail sales on Friday posted their biggest gains in three months in July, although this was partly overshadowed by a slump in consumer confidence.

The Japanese economy shrank much less than expected in the second quarter as companies made strides in restoring output after the earthquake in March.

Recession worries

In the longer-term, economists worry that as a US economic rebound stalls and threatens to spiral into recession, oil demand in the world's top consumer may be slipping into an irreversible decline.

Brent is expected to retrace to $104.43 per barrel as the rebound that started from the Aug. 9 low of $98.74 is ending, while US crude could fall back to $81 per barrel as it faces a strong resistance at $86.79 per barrel, Reuters technical analyst Wang Tao said.

Renewed fears of further supply disruptions in the oil-producing region of North Africa and the Middle-East also supported prices. Muammar Gaddafi urged Libyans on Monday to free the country from "NATO and traitors", as rebels in the west began to strangle a major lifeline to his capital.

In Syria, government forces shelled residential districts in Latakia, residents said, the third day of an assault on Sunni neighbourhoods of the port city which had seen mounting protests against President Bashar al-Assad's rule.