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Brent crude edged above $110 a barrel on Wednesday, after two sessions of losses, as investors switched their focus from the United States fiscal crisis to hopes that growth in top energy consumer China to pick up sooner than expected.
China will make policies more targeted and effective in 2013 to help the economy recover, state television quoted Chinese Communist Party chief Xi Jinping as saying on Tuesday, driving the region's stocks and commodity prices higher.
Gains were however limited by worries that any delay in an agreement to avert a fiscal crisis in the United States may push the world's top oil consumer into deep recession, darkening the outlook for world oil demand, given the debt crisis in Europe.
"The market is currently trading in a right range, conflicted between better growth expectations from China and the short-term worries of the U.S. fiscal situation," said Mark Pervan, head of commodities research at Australia and New Zealand Banking Group.
Front-month Brent futures traded 31 cents higher at $110.15 by 0718 GMT, after losing nearly 1 percent in the previous session. U.S. crude added 36 cents to $88.86.
Asian shares also rose to a 16-month high, led by surging Chinese stocks on hopes for stable growth, while copper rose to a near seven-week high.
U.S. STILL IN FOCUS
The biggest worry across asset classes remains the U.S. fiscal negotiations and the current debate on taxes for the wealthy, proposed by President Barack Obama and opposed by Republicans.
Obama and Republican lawmakers are locked in a battle over measures to avert the so-called "fiscal cliff", a program of spending cuts and tax increases that could push the world's top oil consumer back into recession.
The political picture on Tuesday reflected a solid front of Democrats versus an increasingly shaky group of Republicans.
Any signs of uncertainty on the outcome of fiscal talks will increase market jitters as nearly $600 billion of spending cuts and higher taxes will take effect in 2013 if a deal is not struck by the end of the year.
The absence of such a deal could cut global oil demand by about 0.6 million barrels per day, JP Morgan analysts estimated in a report this week.
"Traders are now resigned to the fact that this will likely be resolved later rather than sooner, with the impasse in Washington likely to be a hindrance to upside market momentum for several weeks yet," Tim Waterer, a senior trader at CMC Markets in Sydney, said in a note.
The talks have switched investor focus from Europe, where a pact between euro zone finance ministers and the International Monetary Fund to help Greece temporarily mitigated worries.
But with more of the region's countries on the brink of a crisis, the euro zone's troubles are far from over and the recurring worries will continue to drag down fuel demand.
MIDDLE EAST TENSIONS SUPPORT
Political and civil unrest in Egypt and Syria and a running dispute between Iran and the United States threaten to disrupt exports from the Middle East, triggering worries about supply.
"Anything to do with the Middle East will underpin prices, but the big concern at the moment is the continuing tension with Iran," said Ben Le Brun, market analyst at OptionsXpress in Sydney.
Iran, embroiled in a dispute with the United States over its nuclear program, said on Tuesday it had captured a U.S. intelligence drone in its airspace, but the White House said there was no supporting evidence.
An inventory report showing a steep drop in U.S. crude stockpiles last week added to the support.
Total U.S. stockpiles dropped by 2.2 million barrels in the week to November 30, beating analyst forecasts for a 300,000 barrel drawdown, data from the American Petroleum Institute showed.
The Energy Information Administration (EIA) will release its weekly data later on Wednesday.