Brent crude hovered near $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 U.S. 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 $110.85 a barrel by 0507 GMT, after earlier rising to a session high of $111.17. U.S. crude climbed 21 cents to $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 U.S. 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 U.S. budget.
"U.S policymakers are looking to avoid a looming fiscal crisis, which has raised fears about the direction of the world's largest economy.U.S. 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