Oil at $85 as Chinese rate hike worries weigh

An employee counts currency at a fuel station in Mumbai June 25, 2010.

PERTH (Reuters) - Oil prices remained steady around $85 a barrel on Monday, as the prospect of Chinese interest rate increases and uncertainty about sovereign debt in Europe continued to weigh on the market.

"The market is worried about consumption, that China will introduce interest rates that will slow demand and as a result of that you could find that oil could trade a lot lower," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.

Analysts said that continued concerns about demand could depress oil prices down to the $80 a barrel level.

U.S. crude for December delivery rose 20 cents to $85.08 a barrel at 0712 GMT.

ICE Brent rose 28 cents to $86.62.

Last week oil prices soared to their highest levels since October 2008, touching an intra-day peak of $88.63 on Thursday, before concerns that a Chinese interest rate hike was imminent pressured prices on Friday.

Although China's central bank did not announce a rate increase at the weekend, continued worries about monetary tightening reduced the appetite for risk, analysts said.

On Monday, the head researcher for the People's Bank of China called for tightening of monetary conditions. Last month, PBOC surprised markets by announcing the first rate rise in nearly three years.

Concerns about European sovereign debt, especially in Ireland, also continued to weight on market sentiment, with Ireland saying that it could not rule out turning to Europe for help in dealing with its debt crisis.

Worries about European sovereign debt were compounded by the G20 and APEC meetings, where leaders of the world's most powerful economies failed to reach any agreement on how to prevent fresh crises.

The International Energy Agency (IEA), an adviser to 28 industrial countries, predicted on Friday oil demand growth will slow in 2011, while raising its 2010 forecast, providing no comfort to traders looking for a more sustained global demand recovery.

The new downward pressure on oil prices interrupts a two-week rally in oil, which was fueled partly on signs that the Organization of the Petroleum Exporting Countries (OPEC) can tolerate higher oil prices and on a plan by the U.S. Federal Reserve to buy $600 billion in Treasury bonds to help speed economic growth.

(Editing by Ed Lane)