Brent near $111 on uptick in China economy; US stock draw

Brent crude hovered near US$111 as the Chinese economy showed further signs of recovery, bolstering the outlook for oil demand, although the upside was limited as a ceasefire in the Gaza Strip eased concerns over supply.

China's vast manufacturing sector saw expansion accelerate in November for the first time in 13 months, while a surprise drop in US oil inventory also supported crude prices.

But supply risks diminished after Israel and the Islamist Hamas movement agreed on Wednesday to an Egyptian-sponsored ceasefire to halt the eight-day conflict around Gaza.

Brent crude futures slipped one cent to US$110.85 a barrel by 0507 GMT, after earlier rising to a session high of US$111.17. US crude climbed 21 cents to US$87.59.

"I'm surprised Brent is so high... there are a lot of predictions that all the weakness in China will eventually get sorted as the new leadership takes over, but it seems like they're not in a huge hurry to over-stimulate," said Tony Nunan, a risk manager at Mitsubishi Corp.

"The whole euro zone situation still remains unresolved, so I think what people are looking for now is for the US to lead the world economy out of its slump. So the big concern is the fiscal cliff. So I think after the holiday, the discussion will be on the US budget."

US policymakers are looking to avoid a looming fiscal crisis, which has raised fears about the direction of the world's largest economy.

US stock markets are closed for the Thanksgiving holiday on Thursday.

The China HSBC Flash Manufacturing Purchasing Managers Index (PMI) rose to a 13-month high of 50.4 in November, the latest indicator of recovery in the real economy after data showing solid credit growth, firmer exports and rising industrial output in the previous month.

An uptick in key economic activity indicators in October has cemented the view of many investors that a rebound in China's economy gathered momentum as it entered the fourth quarter, thanks to a raft of pro-growth policies rolled out by the government in recent months.

But analysts expect the pace of recovery to be modest in the fourth quarter.

"Refinery appetite for crude oil in the second half so far has outperformed the first half in terms of growth but this was partially due to a series of retail fuel price hikes that helped boost refinery margins in September and October," Barclays analysts wrote in a note.

"With retail fuel prices cut again in November, margins are under pressure again, and we could see the gains in refinery runs moderating going into the fourth quarter, especially with underlying product demand not being exceptionally strong."

The United States also reported positive economic data. Manufacturing grew in November at its quickest pace in five months, with a rise in domestic demand hinting that factories could provide a boost to growth in the fourth quarter.

Although little oil is sourced in Israel, concern that oil-producing nations in the Gulf could become involved in the conflict around Gaza has aroused fears of supply disruption.

The U.N. Security Council called on Israel and Hamas to uphold a ceasefire agreement on Wednesday and commended the efforts of Egypt's Islamist President Mohamed Mursi and others for brokering the truce.

"As of this morning, the energy sector is outperforming the market due to higher energy prices despite the alleviation of some supply concerns for crude oil due to the ceasefire agreement in the Middle East," Miguel Audencial, a sales trader at CMC Markets, said in a note.

"It appears that investors are not fully convinced that the temporary break of hostilities is a long-term solution to the conflict in the region."

The latest data from the US Energy Information Administration showed that US crude and refined product stocks fell last week as plants processed more crude and imports dropped.

Total US crude oil inventories fell 1.47m barrels in the week to November 16 to 374.47m barrels, after analysts polled by Reuters had forecast a build of 900,000 barrels.

US inventories of distillates, which include diesel and heating oil, fell 2.68m barrels to 112.84m barrels, compared with forecasts for a smaller, 1.4m-barrel drawdown.