Oil prices rose on Friday on expectations for improved demand in China after data showed the manufacturing sector in the world No. 2 oil consumer expanded in December at its fastest pace in more than a year.
With Brent's January crude contract expiring at the end of Friday's session, Brent was on pace for a more than 1 percent weekly gain, after two weekly losses. U.S. crude needed to settle on Friday above $85.93 to post a weekly gain.
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"Oil is particularly dominated by Chinese potential demand, and any sign of an upturn in China tends to have a positive effect on oil," said Tony Machacek, a broker at Jefferies Bache in London.
The HSBC flash purchasing managers' index for China rose to 50.9 for December, the highest level since October 2011 and the fifth straight monthly gain. A reading above 50 indicates expansion, versus contraction indicated by a figure below 50. [ID : nL4N09O0XF]
The uncertainty and turmoil in the Middle East supported oil prices, with investors concerned about the potential for supply disruption in the region.
Brent January crude rose $1.19 at $109.10 a barrel at 12:22 p.m. EST (1722 GMT), having swung from $108.20 to $109.48.
Brent February crude was up $1.29 at $107.75 a barrel. The spread between January and February contracts continued to price the front-month <LCO-1=R> at a premium, but the premium ranged from $1.17 to $1.87 on Friday.
U.S. January crude was up 75 cents at $86.64 a barrel, having traded from $86.05 to $86.92. The U.S. January contract expires on Dec. 19.
A weaker dollar index, measuring the U.S. currency against a basket of currencies, was supportive to dollar-denominated commodities like oil and copper.
The U.S. currency surrendered early gains and fell against the yen after a report on inflation showed U.S. consumer prices dropped in November for the first time in six months. As a result, the Federal Reserve is expected to maintain its ultra-easy monetary policy.
The U.S. central bank on Wednesday announced plans for more monetary stimulus, hoping to bolster economic growth and jobs creation.
Additional data released Friday pointed to an improving U.S. manufacturing sector. The Fed said manufacturing output rose 1.1 percent in November, the biggest gain since December 2011 an a rebound after the gauge fell in the prior month.
Investors remained cautious because of the stalemate in negotiations between the U.S. Congress and White House over how to avert steep tax increases and spending cuts mandated to start in 2013.
The uncertainty about the U.S. budget talks lessened the supportive effect of reports this week showing a drop in new jobless claims last week to a near four-year low and a November rebound in retail sales.
MIDDLE EAST TURMOIL
Supporters and opponents of Egypt's Islamist President Mohamed Mursi clashed in Alexandria on Friday before a referendum on a new constitution that has divided the country.
Iran's dispute with the West over Tehran's nuclear program remains a factor in the geopolitical risk premium for oil.
The U.N. International Atomic Energy Agency expects to reach a deal with Iran next month to resume a stalled investigation into suspected nuclear weapon research, the chief U.N. inspector said after returning from Tehran on Friday.
IAEA delegation chief Herman Nackaerts said progress had been made even though Iran failed to grant access to the Parchin military complex.
Sounding a less optimistic note, a member of Iran's nuclear negotiation team said talks between Iran and major world powers were unlikely to yield results and it makes no sense for Tehran to stop enriching uranium to 20 percent fissile purity.
The dispute over the nuclear program has resulted in U.S.-led sanctions on much of its energy and other sectors and the European Union has banned imports of Iranian oil since July. (Reporting By Robert Gibbons. Additional reporting by Shadia Nasralla in London and Florence Tan in Singapore; Editing by Grant McCool)