Oil prices rebound, but Italy downgrade weighs

September 20, 2011

, LONDON, Sept 20 – Oil prices rebounded on Tuesday from recent sharp falls, but sentiment remained weak after Italy was slapped with a sovereign debt rating downgrade, and before the US Federal Reserve’s latest meeting.

New York’s main contract, light sweet crude for delivery in October, added $1.08 to $86.78 a barrel.

Brent North Sea oil for November rose $1.46 to $110.60 a barrel in late morning London deals.

Standard & Poor’s downgraded Italy’s sovereign debt assessmemt, citing economic, fiscal and political weaknesses in a fresh blow to Silvio Berlusconi’s fragile coalition government.

The rating agency said it had downgraded Italian debt to “A/A-1” from a “A+/A-1+” grade because of “Italy’s weakening economic growth prospects.”

The downgrade comes at a highly sensitive moment in the eurozone debt drama, which has so far witnessed enormous bailouts for debt-ravaged Greece, Ireland and Portugal.

Many analysts say that Italy and Spain could be the next dominoes to fall in the fast-moving crisis.

“Contagion worries received a boost after rating agency Standard & Poor’s cut Italy’s credit rating by one notch to A whilst keeping its outlook negative,” said oil analysts at the Vienna-based consultancy JBC Energy.

Oil prices had slumped Monday on concern that Greece was on the brink of default, while the market was also rocked by the ongoing political feud over deficit reduction in the United States.

President Barack Obama laid out a jobs and tax plan on Monday which few experts believe has any chance of passing Congress, but which will make clear the battle lines between the White House and Republicans on the lumbering economy.

Markets were looking ahead to a meeting of the Federal Open Market Committee, the key policy body of the US Federal Reserve, to see whether it takes action to boost the ailing American economy.

The FOMC begins its two-day meeting on Tuesday.

“Ongoing uncertainty about economic woes in Europe and the United States continue to adversely affect international oil future markets,” said JBC Energy analysts.

“The austerity plan Italy unveiled earlier this month has obviously failed to convince markets,” they added.

Talks on Greek debt rescue funds, meanwhile, dragged into a second day on Tuesday over tough EU-IMF terms.

Greek Finance Minister Evangelos Venizelos was to hold a conference call with head auditors from the European Union, the International Monetary Fund and the European Central Bank at 1700 GMT.

Athens is under pressure to tighten austerity and speed up asset sales to unlock loan funds before its money runs out next month.

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