Brent crude held steady above $108 a barrel on Monday, drawing support from a brighter economic outlook for top energy consumer China, although investors remained skittish as US talks to avert a year-end "fiscal cliff" dragged on.

Commodities staged their biggest collective gain in two weeks on Friday, led by a rally in oil prices, as data showed China's manufacturing sector expanded in December at its fastest pace in more than a year, reinforcing the belief that the world's number two economy is regaining strength.

February brent crude had edged up 2 cents to $108.20 a barrel by 0512 GMT. US crude rose 17 cents to $86.90 and its January contract will expire on December 19.

"We're just seeing a bit of consolidation after that uptick in China data improved sentiment," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney.

"The market is looking for the next leg-up and that would have to do (with) talks involving the US fiscal cliff."

US House of Representatives speaker John Boehner's offer to accept a tax rate increase for the wealthiest Americans knocks down a key Republican roadblock to a deal on the year-end "fiscal cliff," but a deal has yet to be done, despite the looming deadline.

Failure to avert some $600 billion of tax hikes and spending cuts scheduled to start in January could throw the US back into recession, denting the outlook for demand from the country, the world's top oil consumer.

"I see it as a positive development that one side ... has offered to raise taxes," said Victor Shum, managing director at IHS Purvin and Gertz in Singapore.

Yet investors remained cautious as money managers cut their net U.S crude futures and options positions by 29,449 contracts to 127,751 in the week to December 11, the US Commodity Futures Trading Commission said on Friday.

DEEPLY CUTTING

Fears of oil supply disruption stemming from tensions in the Middle East are also underpinning crude prices.

Iran's oil revenues have been cut in half this year from a year ago, a newspaper quoted Iran's economic minister as saying, an admission of how deeply Western sanctions are cutting Tehran's chief source of funds.

The UN International Atomic Energy Agency expects to reach a deal with Iran next month to resume a stalled investigation into suspected nuclear weapon research, the chief UN inspector said after returning from Tehran on Friday.

But a member of Iran's nuclear negotiation team said talks between Iran and world powers were unlikely to yield results.

"There is some uncertainty surrounding North Korea and the Middle East," Le Brun said. "These issues will probably be a focal point for 2013 rather than the rest of the year."

North Korea rattled the world last week by putting a satellite into orbit for the first time and the United Nations Security Council is to discuss how to respond to the launch. – Reuters