Tap dancing cue observed in Grease (6)
I believe the answer is:
faucet
'tap' is the definition.
(term for a tap in US English)
'dancing cue observed in grease' is the wordplay.
'dancing' indicates an anagram.
'observed in' means one lot of letters goes inside another.
'grease' becomes 'fat'.
'cue' is an anagram of 'uce'.
'uce' inserted into 'fat' is 'FAUCET'.
(Other definitions for faucet that I've seen before include "Pipe" , "Spigot, tap" , "One may turn on this" , "North American tap" , "An American water tap" .)