Crude Above $86 On China’s Improved Manufacturing Outlook

While the dollar and yen weakened, the euro advanced on Friday and crude recovered most of yesterday’s losses after China’s manufacturing outlook improved further in December, brightening the outlook for oil demand from the world’s second largest economy.

Further Growth
China’s economic outlook improved after the key manufacturing sector is expected to grow further in December, according to the HSBC flash manufacturing PMI report earlier today, which rose to 50.9 from the previous 50.5 and above the expected 50.8.

The improvement in China’s factory output is a sign that energy consumption in the country may be on the rise, and if a greater demand from China is sustained; it could give a firm support to prices in 2013.

Adding to upside pressures on oil was the rise in the U.S. retail sales in November to 0.3% from -0.3% in October, and the drop in jobless claims last week to 343K, indicating that economic recovery in the world’s largest oil consumer is also picking up.

Crude Demand
Amid signs showing that demand on oil is going to improve gradually, crude rose above $86 a barrel Friday, heading for its fifth weekly increase in six, trading around $86.60 as of this writing, with the highest at $86.64 and lowest at $86.06.

Crude fell on Thursday despite the fresh round of monetary stimulus announced by the Feds the previous day, aimed to support growth, as the deadlock in the U.S. budget talks and worries that a deal won’t be reached until January overshadowed the upbeat data.

If U.S. lawmakers will fail to reach a deal until January when the $600 billion of automatic tax hikes and spending cuts will take effect, the world’s largest economy could fall into recession , threatening the global economic recovery and damaging demand for oil.

Political Upheaval
But the ceaseless tensions in the Middle East and North Africa and the Western pressures on Iran to stop its nuclear program remain supportive to oil, preventing prices from falling further, as it triggers worries about a possible supply disruption from the region.

Technically , crude oil bounced back from the support around $86.00, and now it faces a resistance at $86.80 which if breached it will head to the next target at $87.45. A support is found at $86.00 which if breached it will head towards the next target at $85.50.

OPEC left this week the production quota unchanged for a second time this year at 30 million barrels a day, and reappoint Libyan Secretary-General Abdullah El-Badri to lead the cartel for another year after members failed to agree on a new leader.

According to Wednesday’s data, U.S. oil stockpiles rose 843,000 barrels last week from an expected decline of 2.5 million. Gasoline stockpiles climbed 5 million barrels while distillates rose 3 million barrels, adding some downside pressures on prices this week.

Brent is trading around $108.54 a barrel after rising 0.58%; natural gas is trading around $3.332 per 1,000 cubic feet after falling 0.45%; while gasoline is trading around $2.75 a barrel after falling from the highest $0.93; heating oil is trading at $3.056 after falling from the highest $3.098.