Oil rises, weighs EU summit prospects, Iran

An oil pump is seen on the shore near Santa Cruz del Norte outskirts of Havana June 10, 2011.

NEW YORK (Reuters) - Crude futures rose in light trading on Tuesday as investors shifted focus from a fading threat of supply disruptions from Iran to prospects that a European Union summit on Friday would produce a workable agreement to contain the debt crisis there.

Trading was choppy as investors mulled the previous day's warning from Standard & Poor's that it may downgrade 15 of the 17 euro zone countries within 90 days depending on the summit's outcome.

"The cost of not agreeing will be higher than agreeing. But for oil markets, if an agreement is reached, there will be a lot of austerity measures and this will affect demand," said Thorbjoern Bak Jensen, an analyst at A/S Global Risk Management Ltd.

In London, ICE January Brent crude settled $1 higher at $110.81 a barrel. Brent posted a small loss on Monday in a late downturn after a report on the S&P warning.

U.S. crude for January edged up 29 cents to settle at $101.28, after ending near flat on Monday.

Brent's premium against U.S. crude widened $9.53 at the close, from $8.82 on Monday.

Brent trading volume was down 37 percent from its 30-day average while U.S. crude volume was 36 percent lower than its 30-day average, according to Reuters data.

FRANCO-GERMAN PLAN "PROMISING"

S&P's warning raised hopes that EU policymakers would act quickly and decisively to tackle the growing debt crisis.

A plan by France and Germany to increase fiscal integration in Europe was "promising" and could help avoid a mass downgrade, Frank Gil, senior director of European Sovereign Ratings at S&P, said in an interview with Reuters Insider.

Further on Tuesday, S&P said it was considering downgrading the European Financial Stability Facility, the euro zone's bailout fund financed by member governments.

Oil got a boost from German economic data showing that industrial orders for October posted their strongest rise since March 2010, analysts said.

Expectations of an interest rate cut this week by the ECB, after European statistics agency Eurostat confirmed estimates pointing to weakening growth also aided oil futures.

IRAN OIL SALES EMBARGO?

The prospect of a ban on European imports of Iranian crude oil may be fading as awareness is growing that an embargo could damage Europe's economy without doing much to undercut Iran's oil revenues, diplomats and traders said.

Iran, the world's fifth-largest oil exporter, has said it cannot rule out a self-imposed oil embargo to punish the West. So the threat of disruptions to Iranian supply was still helping prop up oil prices, analysts said.

Analysts said there was also still a risk of a unilateral strike on Iran by Israel or an escalation of tensions between Tehran and its Arab neighbors.

Elsewhere, tensions eased in Syria, whose oil exports have already been banned by the EU, after it said it had conditionally approved an Arab League peace plan to end eight months of unrest.

OPEC MEETING AWAITED

At OPEC's meeting next week, members are likely to agree on a new production target that legitimizes current cartel output of around 30 million barrels a day.

"Today's elevated oil price is likely to discourage OPEC from cutting, regardless of the rhetoric from Vienna on December 14," Morgan Stanley analysts said in a research note.

U.S. crude oil inventories likely fell last week. On average, U.S. crude stockpiles were expected to have fallen 600,000 barrels last week, according to an expanded Reuters poll of 11 analysts.

The American Petroleum Institute will release its weekly inventory data later on Tuesday. That will be followed by the weekly data from the Energy Information Administration on Wednesday at 10:30 a.m. EST (1530 GMT).

(Additional reporting by Jessica Donati in London; Editing by David Gregorio)