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Oil steady as Obama urges compromise to avoid default

business Updated: Jul 26, 2011 10:54 IST

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

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 US would not be able to pay bills that include monthly Social Security checks, and that may lead to a drop in energy consumption.

Brent crude fell 3 cents to $117.91 a barrel by 0446 GMT, after sliding as low as $117.32. US oil was 32 cents higher at $99.52, after earlier dipping to $98.80. Still, analysts expect the US 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," 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 US has failed to bridge lawmakers' differences with just a week to go to the August 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

Rating agencies have warned that even if Congress raises the debt ceiling and averts a default, they may still strip the US of its AAA credit rating if lawmakers fail to agree on deeper long-term budget cuts.

A lower credit rating could raise borrowing costs not only for the US government but also for other countries, companies and consumers because US Treasuries are the benchmark by which many loans are measured.

Failure to act on the debt limit could push the US 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 US 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.

US 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 US efforts to raise the debt ceiling. Both US and Brent total crude futures trading volumes were under 300,000 lots traded in afternoon trading in New York, with both more than 55% below their 30 day averages.