Brent at 6-week high, atop $120 on debt progress

Brent crude futures hit a 6-week high on Monday, topping $120 a barrel, due to a relief rally after Washington reached a last-minute deal to escape default.

By 0806 GMT, Brent crude was trading $2.90 up at $119.64 a barrel, having risen more than $3 to hit $120.40 earlier. U.S. crude gained $1.73 to $97.44.

After a tense weekend in which rival plans to lift the U.S. borrowing limit were shot down in Congress, U.S. President Barack Obama said leaders from both parties reached a deal to cut the budget deficit by $1 trillion over 10 years, with additional savings of $1.4 trillion possible.

The deal is expected to be passed through the Senate, but it could face tough opposition in the House of Representatives. There are also concerns the United States' top-notch credit rating could be cut.

Oil, most other commodities and equities rose on the deal, while gold and the yen dropped as they lost safe haven appeal. .EU

"The market is cautiously optimistic, so we could potentially see a euphoric rally," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.

But Barratt cautioned the relief could be short lived.

"The initial reaction is that it will act as a stimulus because more money will be put into the economy. The flipside is how long that will last, and concerns about how spending will be cut in the longer term. It's a double-edged sword."

CHINA SLOWING

Analysts pointed out some signs of economic slowdown in key economies, which might lead to a cap on oil demand.

In China, the world's second-largest economy and oil consumer, the official purchasing managers' index (PMI) dipped to 50.7 in July from June's 50.9, data showed on Monday.

China's factory sector struggled with its weakest activity in 28 months in July as manufacturers grappled with a credit shortage and softening global demand.

"PMIs are coming out very weak. The fact is that China is in a downtrend. And with the U.S. also heading lower, I don't expect oil prices to go higher," said Victor Say, an analyst at Informa Global Markets in Singapore.

In Europe, Germany's manufacturing sector grew at its slowest pace in 21 months in July.

Support to oil prices from a U.S. storm was waning. Tropical Storm Don, the year's first major Gulf of Mexico storm, lost much of its punch as it moved ashore in South Texas late on Friday.

As of Sunday, the U.S. Bureau of Ocean Energy Management said 6 percent of the Gulf's oil output remained shut, down from 10.9 percent on Saturday.