London: Brent crude futures hit a 6-week high on Monday before easing, topping $120 a barrel in a relief rally after Washington reached a last-minute deal to escape a debt default.
By 3:38pm, Brent crude was trading up $2.35 at $119.08 a barrel, having risen more than $3 to hit $120.40 earlier, the highest price since mid-June.
US crude gained $1.32 to $97.02.
After a tense weekend in which rival plans to lift the US borrowing limit were shot down in Congress, US President Barack Obama said leaders from both parties reached a deal to cut the budget deficit by $1 trillion over 10 years, with additional savings of $1.4 trillion possible.
The deal is expected to be passed through the Senate, but it could face tough opposition in the House of Representatives. There are also concerns the United States’ top-notch credit rating could be cut.
Oil, most other commodities and equities rose on the deal, while gold and the yen dropped as they lost safe haven appeal.
“The eleventh-hour agreement on the US debt ceiling has left market players more willing to take risks, giving a fillip to oil at the start of the trading week,” Commerzbank said in its research note.
“Relief at the worst being averted in the US could carry prices a little higher if speculators jump on the bandwagon.”
Some analysts cautioned that the relief could be short-lived.
“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,” said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.
Analysts pointed out some signs of economic slowdown in key economies, which might lead to a cap on oil demand.
Factories in Asia and Europe all but stagnated in July, according to business surveys that showed the weakest rates of growth since major industrial powers were struggling through the 2009 recession.
In China, the world’s second-largest economy and oil consumer, the 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.
“PMIs are coming out very weak. The fact is that China is in a downtrend. And with the US also heading lower, I don’t expect oil prices to go higher,” said Victor Say, an analyst at Informa Global Markets in Singapore.
In the euro zone, manufacturing PMI, which gauges the activities of thousands of businesses, fell to 50.4 in July from 52.0 in June - its worst showing since September 2009 and barely above the 50 mark dividing growth and contraction.
UK’s factory activity shrunk in July for the first time in two years.
Support to oil prices from a US storm was waning. Tropical Storm Don, the year’s first major Gulf of Mexico storm, lost much of its punch as it moved ashore in South Texas late on Friday.
As of Sunday, the US Bureau of Ocean Energy Management said 6% of the Gulf’s oil output remained shut, down from 10.9% on Saturday.