(Reuters) - Brent crude climbed above $104 per barrel on Tuesday as China, the world's top energy consumer, showed signs of improvement in its economy though fears of a Spanish bailout curbed gains.
China's manufacturing output in July grew at its fastest pace in nine months, helping lift an index of activity in the country's overall factory sector to its highest level since February and suggesting pro-growth government policies are having an impact.
China is the biggest driver of oil demand and its overall oil demand does not seem to have suffered so much, as it builds up infrastructure and crude stockpile, said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp.
Brent crude gained 81 cents to $104.07 a barrel by 01.17 a.m. EDT, while U.S. crude increased by 58 cents to $88.72.
Brent fell more than 3 percent on Monday after Spain's central bank said the euro zone's fourth-largest economy sank deeper into recession in the second quarter, stoking fears the country was headed for a bailout.
Further clouding investor sentiments, Moody's Investors Service changed its outlook for Germany, the Netherlands and Luxembourg to negative from stable and cited an increased chance that Greece could leave the euro zone.
The euro zone crisis will take months or years to find a solution ... unfortunately there's no quick fix as there are many moving parts, Nunan said.
Financial markets are braced for more evidence of damage to the euro zone economy on Tuesday. July's advance surveys of purchasing managers are expected to produce readings well beneath the boom-bust mark of 50, signaling recession. At best, the reports will show both manufacturing and services are at least stabilizing.
Spain's struggle to avoid a full-fledged international bailout will be on display later in the day when the government sells short-term debt amid widespread investor reluctance to hold peripheral euro zone paper.
Greece, which only last month averted a crisis by having pro-bailout parties win an election, is scheduled to meet its troika of creditors -- the European Union, European Central Bank and the International Monetary Fund -- to renegotiate rescue payments which are crucial to keeping indebted Athens afloat and within the euro zone.
MIDDLE EAST UNCERTAINTY
Oil prices continued to find some support from supply worries triggered by a turmoil in Syria and tensions between Iran and the West over Tehran's nuclear program.
As international pressure continues on President Bashar al-Assad's government, Syria acknowledged on Monday that it had chemical and biological weapons and said it could use them if foreign countries intervened in Syria's civil war.
The risks of escalation of the conflict in Syria, we think, will continue to limit the extent of any bearish sentiment, ANZ analysts said in a note on Tuesday.
Moderating recent threats from Iranian officials about shutting a vital oil shipping lane, a military commander was quoted on Monday as saying Iran would not close the Strait of Hormuz as long as it is able to use the shipping lane itself.
Also on the supply front, U.S. commercial crude oil stockpiles were forecast to have remained unchanged for the week to July 20 as a fall in imports was offset by lower utilization rates, a preliminary Reuters poll showed on Monday.
China's crude oil imports from Iran rose to their highest in nearly a year in June despite tough Western sanctions targeting Iran's oil shipments.
(Editing by Himani Sarkar)