Oil rose to around $111 a barrel on Tuesday as escalating tension over Iran offset plentiful supplies and concerns for the health of the global economy.
Washington cleared the way on Monday for tighter sanctions against Iran to curb the Middle East state's nuclear ambitions, while Tehran increased its rhetoric against Israel, heightening concerns about a potential conflict between the two.
Brent crude oil for November rose $1.55 per barrel to a high of $111.36 before easing back to trade around $110.80 at 1330 GMT. U.S. crude was up 70 cents at $92.63 a barrel.
"The oil market remains caught between supply risks and the prospect of fresh liquidity from the central banks on the one hand, and plentiful supply and growing economic concerns on the other," Commerzbank oil analyst Carsten Fritsch said.
"Until it decides which direction to take, the oil price is likely to continue to fluctuate with a sideways tendency that will depend on which factors happen to be more in focus."
A series of stimulus measures from central banks in the United States, Europe and Japan have lifted risk assets in recent weeks, but investors are increasingly sceptical that the steps will give a significant boost to economic growth.
MORE IRAN SANCTIONS
The U.S. government officially linked Iran's state oil company to the country's Islamic Revolutionary Guard Corps on Monday, allowing Washington to apply new sanctions on foreign banks dealing with the company.
The move could mean Iran struggles to find ways to ship its oil to consumer nations, especially in Asia, where buyers are being deterred by a lack of European insurance cover.
The United States and European Union imposed sanctions on Iran earlier this year to curb Tehran's nuclear plans, which it says are aimed at peaceful power generation.
Adding to worries, Iran's president on Monday ignored a United Nations warning and increased rhetoric against Israel at the U.N. General Assembly in New York.
Investors fretting about prospects for global growth as the euro zone debt crisis continues to deepen were awaiting U.S. oil inventory data on Tuesday for clues to likely demand from the world's biggest economy. Data on Monday showed German business sentiment dropped for a fifth straight month in September.
A Reuters poll published on Monday showed U.S. crude oil stockpiles probably rose last week for the third straight week, while gasoline and distillate stockpiles were also seen higher.
The American Petroleum Institute will release its inventory report later in the day, while the U.S. government's energy department will issue its data on Wednesday.
(Writing by Christopher Johnson; Additional reporting by Ramya Venugopal in Singapore; Editing by Catherine Evans)