Oil rises on Greece hopes, surprise ECB rate cut

Traders work in the crude oil and natural gas options pit on the floor of the New York Mercantile Exchange in New York, July 18, 2011.

NEW YORK (Reuters) - Oil prices rose on Thursday as Greece's government backed away from a proposed referendum on staying in the euro and a rate cut from the European Central Bank raised hopes for an easing of the region's debt crisis.

Signs that the referendum may be abandoned lifted the euro against the dollar, helping spur more buying of riskier assets such as oil and other commodities.

In a surprise move, the ECB trimmed interest rates by a quarter point to 1.25 percent. The market had expected rates to remain unchanged.

In London, Brent crude for December delivery settled at $110.83 a barrel, rising $1.49 and ending a four-day losing streak. It rose as high as $111.24 in late trading.

On the New York Mercantile Exchange, U.S. crude for December closed at $94.07, gaining $1.56 and rising for a second straight day. It hit a session high $94.61.

Brent's premium against U.S. crude was $16.76, just below its closing at $16.83 on Wednesday.

"There was a more positive tone on the market, with the surprise ECB move and later on the developments in Greece that pulled up the euro," said Matt Smith, analyst at Summit Energy in Louisville, Kentucky.

The Greek government teetered on the brink of collapse and was ready to hold talks with the opposition on demands for a transitional government to implement the new EU/IMF bailout program. If that led to a consensus in support of the plan, there would be no need for a referendum.

Oil's gains were trimmed earlier after ECB President Mario Draghi, in explaining the bank's rate move, said downside risks to the economy had intensified and the euro zone was heading toward a "mild recession" by year-end.

U.S. JOBS DATA AWAITED

U.S. economic data was mixed, but crude futures got a boost from a report that first-time filings for jobless benefits had fallen below 400,000 for the first time in five weeks, signaling a modest improvement in the job market for the world's largest energy consumer.

The jobless claims data will not affect Friday's report on payroll levels during October, which is expected to show employers added 95,000 new jobs during the month.

The strength of U.S. heating oil futures, which have been increasing their premium against gasoline as the cold season begins to set in, was also supportive for U.S. crude.

The spread between front-month heating oil against gasoline widened to near 40 cents at the close, the highest since December, 2008, according to Reuters data.

"A small distillate supply deficit amidst strong agricultural demand, an active export market amidst the anticipatory phase of the heavy usage cycle should all combine to elevate heating oil, diesel values relatively as this year winds down," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

In other economic news, growth in the U.S. service sector eased in October to its slowest pace in three months, though new orders for factory goods unexpectedly rose. Chain stores reported disappointing sales in October.

(Additional reporting by Robert Gibbons and Jeffrey Kerr in New York and Claire Milhench in London; Editing by Dale Hudson)