Crude oil gained on Thursday, heading towards $110 a barrel as strong data from China and dollar weakness offset fears about the economic impact of a U.S. government shutdown.

Activity in China's services sector expanded at the fastest pace in six months in September as demand grew, cementing a modest pick-up in the world's second-largest economy.

"With the turnaround in economic indicators in a key emerging market economy like China, we can be positive that demand conditions for oil are going to be benign," said Harry Tchilinguirian, analyst at BNP Paribas.

Brent crude was up 42 cents to $109.61 a barrel by 1340 GMT, its highest in two weeks, after settling $1.25 higher in the previous session.

U.S. oil fell 8 cents to $104.02 a barrel, after ending $2.06 higher on Wednesday.

However, uncertainty on the United States budget and the possibility that it could dent demand kept prices in check.

President Barack Obama met with Republican and Democratic leaders in Congress on Wednesday to try to break a budget deadlock that has shut wide swaths of the federal government, but after more than an hour of talks no breakthrough emerged.

The uncertainty about the budget reassured investors that the Federal Reserve would not end its money printing any time soon which hit the dollar.

A weaker dollar supports commodities, which are priced in the greenback, as it makes them more affordable to holders of other currencies.


Oil got a boost on Wednesday on news that TransCanada Corp's Keystone XL Gulf Coast pipeline would start up by the end of the year.

The pipeline will ship crude from the delivery point of U.S. oil futures at Cushing, Oklahoma, to Texas. A glut of oil at Cushing has depressed prices.

However until the pipeline is completed, stockpiles will likely remain high. Crude inventories in the United States rose sharply last week as refinery utilisation fell, while the drawdown at Cushing slowed.

An easing of geopolitical risks in recent weeks has helped push oil down from a peak of above $117 in late August.

U.S. Secretary of State John Kerry said on Thursday that the United States hopes to engage with the new Iranian administration over its nuclear weapons programme, but Tehran must first prove it is willing to end a standoff.

Iran will present its plan for a resolution of the nuclear issue at talks with the five permanent members of the U.N. Security Council and Germany (P5+1), scheduled to be held in Geneva on Oct. 15 and 16, Iranian President Hassan Rouhani said on Friday.

"If there is progress in the P5+1 talks with Iran, that will put some pressure on crude oil prices," said Olivier Jakob at Petromatrix in Zug, Switzerland. (Editing by William Hardy)