Oil was steady near $84 on Wednesday, capped by a stronger dollar as financial markets  remained focused on Europe's debt problems, while an industry  report signalled a drawdown in US fuel inventories may be  slowing.

US crude for January edged up 12 cents to $84.23  a barrel by 0244 GMT, after tumbling 2 percent on Wednesday.

Prices still posted a third straight monthly gain, up by more  than 3 percent in November, when they also touched a 25-month  high of $88.63.

ICE Brent gained 5 cents to $85.97.

Factories in China, the world's second-largest oil user,  raised output in November as shown by the official purchasing  managers' index (PMI), which climbed to a seven-month high.  But rising input prices also signalled a need to tighten  monetary policy to curb inflation, a move that would cut  energy demand.

The euro suffered yet another setback on Wednesday, with  the dollar up by more than 0.1 percent against a basket of  currencies , after Standard & Poor's threatened to cut  the credit ratings of Portugal, inflaming a market already  rocked by worries about Europe's debt crisis.

"Weak equities and dollar strength capped the upside as  fundamentals suggest physical supplies would remain adequate,"  said Stefan Graber, a commodities analyst with Credit Suisse  in Singapore. "In the US, inventories of crude oil, distillates and gasoline all remain above their five-year  average.”

Inventories of distillates including heating oil diesel unexpectedly rose by 224,000 barrels last week in top consumer the United States, according to an industry report published  Tuesday by the American Petroleum Institute (API).

Should the increase be confirmed in a government report  from the Energy Information Administration (EIA) due on  Wednesday at 1530 GMT, that would end a streak of nine  consecutive weekly drops. The average forecasts from a Reuters  poll of analysts is for a decline of 1.1 million barrels.

Gasoline stockpiles rose 1.1 million barrels last week  according to the API, almost three times the projected  400,000-barrel gain.

US crude inventories fell by 1.1 million barrels in the  week through Nov. 26, the API said, compared with expectations  for a 900,000-barrel decline.

A drawdown of a bigger magnitude than that reported by the  API "would bring oil inventories closer to their five-year  average, which might provide the market with a positive  impulse," Graber said.

US consumer confidence rose in November to its highest  in five months and US Midwest business activity grew faster  than expected, providing further evidence of economic recovery.

Still, a faster-than-expected fall in prices of US single-family homes in September underscored the hurdles  remaining for the recovery.

S&P's warning about Portugal came after Ireland on Sunday  secured an 85-billion-euro bailout package from the European  Union and International Monetary Fund, seven months after  Greece was thrown a lifeline to tackle its debt problems. – Reuters