Oil rises on easing euro zone worries

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Brent crude oil futures firmed on Tuesday, as the euro zone narrowly avoided recession and as better-than-forecast German first-quarter GDP data raised hopes that Germany would steer the way through the European debt crisis.

The euro zone economy stagnated, with zero growth, the EU's statistics office Eurostat said on Tuesday.

The results were more positive than forecast, boosting riskier assets, but the region's debt crisis has sapped the life out of the French and Italian economies and widened a split with paymaster Germany.

Brent crude staged further gains, rising by 80 cents to $112.37 a barrel by 1215 GMT and erasing the previous session's losses, when prices slid to $110.04, the lowest intraday price since Jan. 25.

U.S. crude rose 12 cents to $94.90 a barrel, after Monday's fall to $93.65, the weakest intraday price since Dec. 19.

EUROPEAN DATA

German gross domestic product grew by 0.5 percent in the first quarter, far exceeding forecasts due largely to robust exports and pushing the euro above a four-month low

"The market is still reacting to European data, it's not positive but it's better relative to expectations - a relief," said James Zhang, analyst at Standard Bank, "It is giving strength to the euro and therefore the oil market."

The currency's recovery has boosted traders' confidence that European oil demand will not weaken as precipitously because the euro's strength versus the dollar gives the euro zone greater capacity to buy the dollar-based commodity.

"But the rise has been tempered by Italy's disappointing GDP and Moody's downgrade," said Thorbjoern Bak Jensen, oil analyst at Global Risk Management.

Italy's economy contracted by a larger-than-expected 0.8 percent quarter-on-quarter in the first three months of 2012, prompting Moody's to downgrade 26 Italian banks on Monday.

GREEK STALEMATE

The Greek political stalemate remained the biggest weight on prices as many market players believe there is little hope President Karolos Papoulias's proposal to form a technocrat government will be successful.

A fresh election seems the most likely outcome, making it more likely for Athens to ditch its bailout pledges and hence the euro.

"The EU has prevaricated for two years but they can delay no longer on whether Greece is in or out," said Guy Wolf, macro strategist at Marex Spectron, "I do not see how they can default and stay in the euro, I do not see the point."

The oil demand outlook continued to weigh on prices. U.S. crude inventories were expected to have risen for an eighth straight time last week, a Reuters survey of analysts on Monday showed.

Meanwhile, the physical market remains well supplied, with Saudi producers pumping enough oil to deal with the impact of the sanctions on the oil market, analysts said.

A slowing Chinese economy kept a lid on gains as its previously booming economy accounted for most of global oil demand growth.

China's Commerce Ministry said on Tuesday the country's foreign direct investment (FDI) inflows dropped 2.4 percent in the first four months of this year from last year, the longest period of declining inflows since the depths of the global financial crisis.

FDI is an important gauge of the health of the external economy, to which China's vast factory sector is oriented.



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