Brent crude oil rose above $108 a barrel on Tuesday as a slightly weaker dollar and Middle East unrest supported prices, but stalled fiscal talks in the US capped gains.

Brent crude was up 78 cents to $108.11 a barrel by 1155 GMT. U.S. crude was at $86.06, up 50 cents.

The dollar index edged down 0.14 percent on prospects of more monetary stimulus from the U.S. Federal Reserve.

Continued unrest in Egypt, fighting in Syria, pressure on Iran to stop its nuclear programme and the killing of a senior intelligence officer in Yemen have lent support to oil prices.

"Middle East tensions support prices to some extent, and from an intra-day perspective they can easily push prices up 1 percent," said Filip Petersson, a commodities analyst at SEB in Stockholm.

"Although what has happened in Egypt or Syria has no direct impact on oil supply, it could do if the chain of events is negative."

German analyst and investor sentiment rose sharply in December and entered positive territory for the first time since May, lending support to optimism concerning demand outlook in the euro zone's largest economy.

The ZEW think tank said its monthly poll of economic sentiment jumped to 6.9 points from -15.7 in November.

Data showed that China's oil demand hit a record high in November after its refiners raised output to replenish stocks, a sign that growth in the world's second largest economy and oil consumer is picking up.

"The Chinese oil market data was supportive, giving a reason for Brent to go up," SEB's Petersson said.

Talks were held on Monday between the White House and House of Representatives Speaker John Boehner's office to break the U.S. fiscal debate stalemate, although neither side showed any sign that they were ready to give ground.

Economists say that going over the so-called U.S. fiscal cliff, which consists of steep tax hikes and budget cuts set to kick in next month, could throw the world's biggest oil consumer back into a recession.

FOCUS ON SUPPLIES

Traders will be keeping a close watch on any changes in Opec supply as the group meets in Vienna on Wednesday and on weekly U.S. oil inventories data to be released over the next two days.

"We have a substantial oversupply in the crude oil market, and it will be even more substantial in the first quarter," Petersson said, painting a bearish picture.

"I imagine they will hold on to the 30 million barrels per day quota, which would be good. At the moment they are producing more than that."

The 12 Opec members are collectively producing about 1 million bpd of crude more than needed, swelling oil stocks at a time of weak demand, Iranian Opec governor Mohammad Ali Khatibi said.

"We estimate the call on Opec crude at 31.1 million barrels per day in 2013," Vienna-based JBC Energy analysts said in a note.

"Concerted action by Opec would only occur if our forecast for the call on Opec crude were revised down by around 1 million barrels per day."

In the United States, commercial crude oil stockpiles were forecast to have fallen last week amid high refinery demand, while gasoline inventories were expected to rise, a preliminary Reuters poll of five analysts showed. – Reuters