Oil rallies with euro, equities on EU deal

Excess oil is burnt off at the Mobil oil refinery at Altona in Melbourne June 27, 2008.

NEW YORK (Reuters) - Oil prices rallied on Friday, after a choppy start, as an agreement for a closer euro zone fiscal union and news of a Chinese fund for U.S. and European investment lifted the euro and equities markets.

Brent and U.S. crude futures both posted weekly losses, and sources said skepticism about the latest European Union agreement to tackle their debt crisis limited crude price gains on Friday, along with weak heating oil futures.

Low volume trading helped keep oil trading volatile, and oil did not get much of a boost initially from a report showing U.S. consumer sentiment rose in early December to its highest level in six months.

All 17 members of the euro zone and six other countries that aspire to join the bloc agreed to negotiate a new deal alongside the EU treaty with a tougher deficit and debt regime to insulate the euro zone against the debt crisis.

"The oil complex proved less enthused about the EU summit agreement than was the case with the stock market," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note.

ICE Brent January crude rose 51 cents to settle at $108.62 a barrel, recovering after dropping $1, but posting a 1.2 percent weekly loss.

U.S. crude futures rose $1.07 to settle at $99.41 a barrel, recovering from a $97.36 intraday low and having lost more than 2 percent on Thursday. It posted a 1.5 percent weekly loss.

Brent trading volumes were 22 percent under the 30-day average, and while U.S. crude trading outpaced Brent, volume was 6 percent below the 30-day average.

U.S. heating oil futures closed lower as unseasonably mild weather and rising distillate inventories weighed on prices, while gasoline futures ended higher.

Crude oil and refined products stockpiles rose last week, the government reported on Wednesday.

In the week to Tuesday, speculators raised their net long positions in U.S. crude oil futures and options position, data from the U.S. Commodity Futures Trading Commission showed on Friday.

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Euro zone in graphics r.reuters.com/hyb65p

Graphic on Iran oil exports: link.reuters.com/jad45s

Sanctions imposed on Iran: link.reuters.com/had45s

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CHINA

A Reuters report that China's central bank would create a new investment vehicle worth $300 billion, partly focused on Europe, raised hopes that Chinese funds could be used to support European growth and bolster demand.

Thorbjoern Bak Jensen, analyst at Global Risk Management, said news of the Chinese investment fund had helped reverse negative sentiment after the division at the EU summit.

"It gives some support to risk sentiment," Jensen said.

A separate report showed China's annual inflation rate fell in November to 4.2 percent, lowest in more than a year, fueling expectations for more monetary policy easing to stem slowing economic activity.

The inflation rate is now close to the government's official target of 4 percent and has dropped rapidly since hitting a three-year high of 6.5 percent in July.

Chinese industrial output rose 12.4 percent from a year earlier, though slowing from October's 13.2 percent.

IRAN AND GEOPOLITICS

Continuing tensions between the West and Iran remained a background support for oil prices, along with political risk remaining in Syria, Egypt and in parts of the Gulf.

The risk of a supply disruption from Iran has risen with European Union leaders discussing more sanctions against the Islamic Republic in an effort to put pressure on Tehran over its nuclear program, though the EU did not make an explicit call for an embargo on oil.

(Additional reporting by Gene Ramos and Eileen Moustakis in New York, Christopher Johnson in London and Francis Kan in Singapore; Editing by Alden Bentley and David Gregorio)