Brent crude rose above $108 a barrel on Friday on a brighter outlook for China's economy, the world's second largest oil consumer, but worries about the impact of a possible US fiscal crisis capped price gains.
Growth in China's vast manufacturing sector picked up in December, reinforcing recent indications of a revival in the country's economic recovery that could boost fuel demand. Further support came from strong employment and retail sales data from the United States - the world's No.1 oil consumer.
Brent crude is set to eke out its first weekly gain this month. The January contract, which expires later on Friday, rose 94 cents to $108.85 a barrel by 2.08pm UAE time.
US crude for January delivery was up 92 cents at $86.81 and on track for its fifth weekly gain in six.
"We're seeing positive PMI, industrial data and they are all pointing to the direction of an economic recovery," said Sijin Cheng, a commodities analyst at Barclays Capital.
"The underlying demand is going to improve gradually."
China HSBC flash purchasing managers' index for December rose to 50.9, a 14-month high. Data released earlier this week showed that China's November crude imports matched the third highest daily rate on record as new refining units started operations.
Chinese officials are expected to maintain the 2012 economic growth target of 7.5 percent when they chart a course for 2013 at a meeting this weekend.
But a ceiling is expected to stay on oil prices for as long as a stalemate over how to avert the US "fiscal cliff" of steep tax increases and spending cuts that kicks in early next year is not resolved.
Frustration mounted over the recent lack of progress in negotiations between the Democrats and the Republicans as the year-end deadline loomed, overshadowing promising data which showed new jobless claims dropped last week to a near four-year low and retail sales rebounded in November.
"As each day comes and goes without a deal struck in Washington, investor anxiety over a potential fiscal freefall ratchets up a few extra notches," Tim Waterer, a senior trader at CMC Markets in Sydney said in a note.
The Organization of the Petroleum Exporting Countries (OPEC) is relaxed about the prospect of rising inventories in the first half of next year, the group's secretary general said on Thursday, so long as oil prices avoid extreme moves from their current acceptable level.
The OPEC agreed on Wednesday to maintain its oil output target of 30 million barrels per day (bpd), a production level the group exceeded in November by 800,000 bpd.
But forecasts for lower demand suggest OPEC may need to cut output at some point next year.
However, Iraq has said it "will never cut production", adding that other OPEC producers should shoulder the burden of cuts if a reduction in supply is required.
The second largest producer after Saudi Arabia is falling behind production targets as logistical bottlenecks and weak infrastructure hampered investors' ability to ramp up output.
Oil major BP is close to reaching a deal with Iraq to cut the final production target for the supergiant Rumaila oilfield to between 1.8 million and 2.2 million bpd, down from 2.85 million bpd agreed in 2009.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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