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Oil reaches two-week high above $85 on Ireland rescue
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4:26am EST

By Christopher Johnson

LONDON (Reuters) – Oil rose to a two-week high above $85 on Monday after the European Union approved a rescue for Ireland and outlined a permanent system to resolve the euro zone’s debt crisis.

Worries that a spreading crisis within the euro zone would keep a lid on growth and hence energy demand have helped pressure commodities prices over the last week, pulling down oil from a two year high of $88.63 on November 11.

U.S. crude for January rose 1.5 percent or $1.27 to a high of $85.03 a barrel before easing back to trade at $84.76 at 0845 GMT.

ICE Brent for January rose 90 cents to $86.48, returning to positive territory as the dollar weakened by 0.2 percent against a basket of currencies.

Finance ministers from the 16-nation euro zone, anxious to prevent euro debt concerns engulfing Portugal and Spain, unanimously endorsed an emergency loan package of 85 billion euros ($115 billion) to help Dublin cover bad bank debts and bridge a huge budget deficit.

“The southern European sovereign debt crisis would have to take a severe turn for the worse to derail positive commodity price trends that are finding strong support from improving fundamentals and positive market sentiment toward growth assets” following the second wave of U.S. expansionary monetary policy, Barclays Capital analysts said in a report.

Still, some market participants were wary that the package for Ireland would fail to end Europe’s credit problems, citing the Greek crisis as a precedent of how markets initially reacted positively to a bailout and then slumped.

“It is just a relief rally, but there are still so many structural problems that people are already targeting other dominoes like Portugal and Spain,” said Michelle Kwek, an analyst at Informa Global Markets in Singapore.

Currency and bond traders doubted the deal was enough to prevent fiscally pressured Portugal and Spain from being next in line to suffer a debt crisis.

GEOPOLITICAL RISK RETURNING

South Korean President Lee Myung-bak on Monday labeled North Korea’s artillery attack on a west coast island a crime against humanity and said the South would retaliate against any further provocation.

China on Sunday called for emergency talks to resolve the crisis, and Seoul and Tokyo said they would study the proposal, as the U.S. and South Korean militaries started a massive drill.

Tensions between North and South Korea have mostly been bearish for the oil market because of the implications that war would have on demand at the heart of Asia’s top consuming region. But other geopolitical events were having a mild bullish effect on the market, traders said.

Saudi Arabia’s King Abdullah has repeatedly urged the United States to attack Iran’s nuclear program and China directed cyberattacks on the U.S., according to a vast cache of U.S. diplomatic cables released on Sunday in an embarrassing leak that undermines U.S. diplomacy.

King Abdullah, being treated in New York for a blood clot which complicated a slipped disc, has started rehabilitation and his health is “very reassuring,” the kingdom’s health minister said on Sunday.

Enbridge Inc’s (ENB.TO: Quote, Profile, Research, Stock Buzz) 670,000-barrel-a-day Line 6A oil pipeline in the U.S. Midwest was expected to run at reduced rates until this week, creating another costly bottleneck for Canadian crude exports, the company said on Friday.

(Additional reporting by Alejandro Barbajosa; editing by Keiron Henderson)