Oil Rises on Chinese Economic Data

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 concern 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 US, the world's largest oil consumer.

Brent crude is set to eke out its first weekly gain this month. The January contract, which expires later on Friday, rose 59c to $108.50 a barrel by 6.05am GMT.

US crude for January delivery was up 69c at $86.58 and on track for its fifth weekly gain in six.

"We're seeing positive PMI (purchasing managers index), 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's HSBC flash PMI 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% 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.

Opec supply

The Organisation of the Petroleum Exporting Countries (Opec) was 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 avoided extreme moves from their current acceptable level.

Opec agreed on Wednesday to maintain its oil output target of 30-million barrels a day, a production level the group exceeded in November by 800,000 barrels a day.

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 oil field to between 1.8-million and 2.2-million barrels a day, down from 2.85-million barrels a day agreed in 2009.