(Reuters) - Brent crude rose more than a dollar on Thursday, breaching $116 per barrel on renewed hopes for another round of monetary stimulus by the U.S. Federal Reserve, helping investors look past weak manufacturing data from China.
The prospect of further economic stimulus from the Fed should boost the outlook for demand from the world's top oil consumer, although more evidence of a slowdown in China, the second biggest user, could limit price gains.
Brent October futures rose $1.21 to $116.12 a barrel by 0716 GMT, rising for a third straight session. The prices hit a high of $116.18 earlier in the session.
U.S. crude was up 95 cents at $98.21 per barrel, off a three-month high of $98.29 earlier in the session.
"We are in the midst of the U.S. holiday season, when demand for oil is high, and the added impetus is the prospect of stimulus," said Jonathan Barratt, chief executive of BarrattBulletin, a Sydney-based commodity research firm.
Traders are also keeping an eye on Tropical Storm Isaac, which could become a hurricane on Thursday, threatening U.S. energy interests in the Gulf of Mexico.
Minutes from the latest meeting of Fed policymakers released on Wednesday suggested that the U.S. central bank is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves considerably.
The Fed's policy has been fairly dovish, given that overnight interest rates are near zero and it has bought $2.3 trillion in U.S. government debt and mortgage-related bonds to push borrowing costs lower. It has said it does not expect to raise rates until late-2014 at the earliest.
Further stimulus may weaken the dollar, which in turn will spur prices of all commodities, while any boost to the U.S. economy from the stimulus may also drive up demand for oil.
CHINA DATA DISAPPOINTS
Crude futures pared some gains after disappointing data from China signaled that a persistent slowdown in the world's biggest energy consumer has extended into the third quarter.
The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, its lowest level since November, from 49.5 in July.
After hovering for several months just under the 50 mark that divides expansion from contraction, the index is now at levels rarely seen since the 2008-2009 global financial crisis.
The weak data adds to worries that have been lingering because of the European debt crisis.
Eurogroup chief Jean-Claude Juncker kept alive Greek hopes of winning more time to push through austerity cuts but warned the country was staring at its "last chance" to avoid bankruptcy.
Greece's prime minister will meet leaders of Germany and France this week to seek concessions in some terms of the bailout agreement.
However, initial signs suggest that both leaders may offer little leeway and expect him to stick to the original terms.
Worries about oil supply remain amid continued unrest in the Middle East, with increasing violence in Syria and tensions between Iran and western nations nowhere near resolution.
The Syrian army this week used tanks and helicopter gunships in an offensive around the capital of Damascus that coincided with the departure of U.N. military observers, whose mission to stop bloodshed and nudge Syria towards a peaceful transition was a failure.
The chief of the U.N. nuclear watchdog, which will resume talks with Iran on Friday over its disputed nuclear programme, played down chances of a breakthrough. The dispute has led to sanctions by the U.S. and European Union on shipments from Iran and has driven up crude prices.
Brent prices also remain supported by an expected cut in North Sea oil production related to maintenance. But initial estimates of the output cut may be revised downwards after tweaks to August and September export schedules, boosting supply of crude from the home of the global Brent oil benchmark.
Low product balances could keep Brent well supported in the near term, Morgan Stanley analysts, led by Hussein Allidina, said in a report.
"However, seasonally weaker crude demand, returning supply, and the risk of an SPR release should all help alleviate tight global markets this fall," they added, referring to last week's news that the United States was taking another look at old plans to tap its Strategic Petroleum Reserve (SPR).
Investors were also focusing on U.S. data that showed crude inventory fell sharply last week.
U.S. crude oil stockpiles dropped 5.41 million barrels to 360.75 million barrels in the week ended on Friday, amid a drop in crude imports, the Energy Information Administration reported. Analysts polled by Reuters had forecast a smaller drop of 400,000 barrels.
The data followed a late Tuesday report by industry group American Petroleum Institute that showed crude stockpiles had fallen 6 million barrels last week.
(Editing by Himani Sarkar)