Brent futures rose above $109 a barrel on Friday on expectations of steady demand growth as the manufacturing sector in China, the world's second-biggest oil consumer, expanded at its fastest pace in 18 months.

The European benchmark came under pressure overnight as investors sold the spread between the contract and the U.S. benchmark after the price difference between the two widened to the most in six months.

Yet Brent is set to post its biggest weekly gain in about two months, on concerns over supply as Libya struggles to ramp up exports and unrest in Iraq worsens.

Brent crude gained 22 cents to $109.06 a barrel by 0404 GMT, after settling down $1.02. U.S. oil slipped 5 cents to $96.33 after ending down 39 cents.

"The latest data shows that China will take measures to ensure growth will stick to the government-set target of 7.5 percent," said Victor Shum, vice-president of energy consultancy IHS Energy Insight.

"Supply concerns over Libya and Iraq will also keep oil supported."

In the first nine months of the year, China's economy grew 7.7 percent from a year earlier, putting it on track to achieve Beijing's 2013 target of 7.5 percent, though that would still be China's worst performance in 23 years.

Economists in a recent Reuters poll saw the economy growing an annual 7.5 percent in the fourth quarter from 7.8 percent in the third.

Shum expects Brent to hold around the $108 a barrel mark over the short term because of supply concerns amid steady demand, while U.S. crude may trade between $95 and $100, rising towards $100 as refiners in the world's top oil consumer return from maintenance to soak up bulging inventories.

The improvement in the U.S. contract will help narrow the price gap between the two contracts, Shum said. Brent's premium over WTI had risen by nearly $5 over the past five sessions, and expanded to as much as $13.60 a barrel overnight.

"The spread between the two has gone too wide, but I do understand the reasons for it," said Shum. "Brent is being supported by production issues, while WTI is being weighed down by the rather big build in U.S. crude stocks."

SURPLUS CAPACITY

The outages in Libya are putting a strain on global spare capacity, a key factor influencing crude prices.

While the U.S. Energy Information Administration (EIA) said global spare crude oil production capacity rose slightly in September and October, a prolonged disruption in Libyan supplies and concerns of growing unrest in Iraq mean the oil industry will have to rely solely on top exporter Saudi Arabia to fill any gap in output.

The spare output capacity, which is the amount of oil that global producers can quickly bring on line without major investment, and a key factor in global crude prices, averaged 1.8 million barrels a day in September and October, or 200,000 bpd higher than in the previous two months.

Brent may retest resistance at $108.46, while signals are mixed for U.S. oil as it is not clear if the contract could break a support at $95.78, said Reuters technical analyst Wang Tao. – Reuters