Oil rose to around $108 a barrel on Wednesday, recovering from a three-month low, on hopes the United States would continue with its stimulus programme and that the European Union would reach a last-minute deal to bail out Cyprus.
Cypriot leaders were holding talks in Nicosia after parliament on Tuesday rejected the terms of a European Union bailout. The finance minister, in Moscow trying to secure a loan agreement, said he had not reached a deal on financing with his Russian counterpart.
Brent crude for May rose 58 cents to $108.03 a barrel by 1022 GMT after a near 2 percent drop to a three-month low in the previous session. U.S. crude for April was up 52 cents to $92.68.
"Clearly, market players anticipate that an alternative solution will be found for Cyprus," said Carsten Fritsch, analyst at Commerzbank. "Nonetheless, the uncertainty surrounding this issue is likely to continue to keep oil prices in check in the short run."
Crude also gained support from Tuesday's American Petroleum Institute (API) report showing a surprise decline in U.S. crude inventories. Investors will be looking to government figures due out later on Wednesday for confirmation of the move.
On the technical charts, Brent faces its first upward resistance point at $108.50, said Olivier Jakob, oil analyst at Petromatrix. Support levels to watch on Wednesday are $107.50 and then 107.00, he said.
The uncertainty about Cyprus's finances has revived concern about the stability of the euro zone and of the downside risks to global economic growth.
The U.S. Federal Reserve is wrapping up a two-day meeting on Wednesday and appears set to sustain its $85 billion monthly bond-buying stimulus, despite improving U.S. economic data.
"The Fed is unlikely to start winding back stimulus until the economy is improving at a good clip," said Ric Spooner, chief markets analyst at CMC Markets in Sydney.
Any signs of a tighter monetary policy could strengthen the U.S. dollar, which was weaker on Wednesday. A weaker dollar tends to support the price of oil and other dollar-denominated commodities.
As well as the Fed's policy statement, oil traders are awaiting weekly oil inventory figures from the U.S. government's Energy Information Administration for a snapshot of supply and demand trends.
Tuesday's API report showed U.S. crude stocks fell by 413,000 barrels last week. Analysts expected them to rise by 2 million barrels.