Brent climbs above $106 as steep slump prompts investors to buy

But prices could weaken amid expectations the US Fed will scale back its monetary stimulus.

Brent futures rose above $106 a barrel on Monday as investors locked in fresh positions after the previous session's steep fall, but prices could weaken amid expectations the US Federal Reserve will scale back its monetary stimulus.

Upbeat U.S. manufacturing data stirred speculation the Fed may roll back its monetary stimulus in December, instead of March as many currently expect, boosting the dollar and weighing on most commodities. Yet that was countered by a deepening crisis in Libya, helping keep oil prices supported.

Brent rose 32 cents to $106.23 a barrel by 0545 GMT, after settling nearly $3 lower on Friday at its lowest since July 4. U.S. oil gained 4 cents to $94.64, after ending $1.77 lower and posting its fourth straight week of losses.

"We are still in a situation where we could see significant swings in the dollar and that will lead to a lot of volatility in oil and other commodities," said Ric Spooner, chief market analyst at CMC Markets. "This week it is going to be a data story, but we are likely to see further downside for oil."

More data pointing to a strong recovery in the United States, in addition to numbers that came out on Friday, would raise expectations the Fed may cut back its stimulus.

That would reduce supply of dollars in the market, bolstering the currency and making dollar-denominated assets such as oil more expensive for holders of other currencies.

The dollar index was holding firm at 80.691 on Monday having climbed to a seven-week peak on Friday.

Brent faces resistance at $108.70 and support at $102.50 this week, Spooner said. For the U.S. benchmark the upper end is $98.70, with the next support at $92.70 once the contract makes a significant breach below $94.67, he said.

PRICE OUTLOOK

For the fourth quarter, prices may remain under pressure and slide from current levels, analysts at Barclays said in a note.

"In our view, Q4 is rich in swing factors for the crude oil markets, yet the directional bias for prices is slightly to the downside from current levels," they said. "We maintain our Q4 forecast of $105/bbl for Brent and do not expect prices to venture out too far on the upside from $110/bbl currently."

The spread between Brent and the US benchmark, which held around $12 a barrel, may widen to as much as $15 a barrel, analysts at BNP Paribas said in a note. That would make it the widest since March, according to Reuters data.

Developments in OPEC-producer Libya left investors worried about supply, keeping oil supported.

Leaders of an autonomy movement in Libya's oil-rich east unilaterally declared a regional government on Sunday, in a further challenge to the weak central government.

The recent spate of protests and strikes at ports and oil fields have knocked down crude production to some 10 percent of Libya's capacity of 1.25 million barrels a day.

While easing of tensions between Iran and the West about Tehran's disputed nuclear programme and a weak global economy mean supply fears have eased somewhat and oil markets are amply supplied, concerns over disruption from the region continue to remain nevertheless.

"Middle east is not in the agenda right now, but it is always with us," Spooner said. "Any new supply threat, or significant decline in output will support prices."