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UPDATE 2-Brent dips towards $109 on nerves ahead of Fed meeting

Manash Goswami
Tuesday, 17 Dec 2013 | 2:46 AM ET

* U.S. factory activity gains steam, euro zone ends year on a high

* EU to ease sanctions as soon as Iran curbs nuclear work

* U.S. crude inventories down last week on lower imports -poll

* Coming Up: U.S. ICSC weekly chain store sales; 1245 GMT

(Updates prices)

SINGAPORE, Dec 17 (Reuters) - Brent futures slipped towards $109 a barrel on Tuesday as the biggest gain in two weeks a day earlier prompted investors to sell ahead of a key U.S. Fed meeting in which the central bank may take a decision on tapering its stimulus.

The market is hoping for a better sense later this week of when the Federal Reserve may start to reduce its $85 billion-a-month bond-buying programme, a major driver of investment in commodities. Though, a prolonged halt in Libyan exports coinciding with a better demand outlook may help cushion falls.

Brent crude fell to as low as $109.15 a barrel and traded 10 cents down at $109.31 by 0724 GMT, after settling $1.64 higher. U.S. oil dropped 18 cents to $97.30, after ending 88 cents higher.

"What we are seeing now is some clearing up of positions ahead of the Fed meet after Brent rose past the $110 mark," said Tetsu Emori, a commodities fund manager at Astmax Investments.

"But (the) demand side is getting healthy. China is coming back, Europe is getting better and so is the United States. That will keep prices supported."

Global manufacturing and business activity expanded in December as euro zone businesses ended the year on a high thanks to a surge in new orders. The December PMI reading for Europe was the second-highest since mid-2011 and beat the median forecast in a Reuters poll.

In the United States, manufacturing output rose for a fourth straight month in November, adding to solid reports on retail sales and employment that have painted an upbeat picture of the world's biggest economy.

The spate of positive numbers from the United States is convincing some investors the Fed may announce a tapering after its two-day meeting on Wednesday. Others expect it to wait for more evidence of a recovery before tapering the stimulus.

MARKET OUTLOOK

This overall economic improvement in developed nations is reviving demand growth hopes and any worries over supply from the Middle East will keep Brent above $110 a barrel and U.S. oil above $98 as the market is already coping with disruptions in Libya, Emori said.

"For Brent crude, we see prices supported with Libya defaulting on their promise to resume production over the weekend," analysts at Phillip Futures said in a note.

A colder winter is also expected to support oil prices, analysts at ANZ said in a note.

"Incorporating the month-to-date weather and the forecast for the rest of the month, December is forecast to be 5% colder than the 10 year average for the three major OECD markets - U.S., Europe and Japan," ANZ analysts said.

For now, a European Union governments' pledge to suspend some sanctions against Iran as soon as the U.N. nuclear watchdog verifies that Tehran has curbed its atomic work under a landmark deal last month is also weighing on prices.

Investors are also awaiting data on U.S. crude stockpiles to gauge the demand outlook for the world's biggest oil consumer. Commercial crude inventories fell an average of 3.6 million barrels last week because of declining imports, a preliminary Reuters poll of analysts showed.

(Editing by Muralikumar Anantharaman and Ed Davies)