Oil prices rose on Wednesday as expectations a battle over the U.S. budget will be resolved spurred optimism about crude demand in the world's top consumer.
Concerns about the risk of a U.S. recession if no deal is reached to avoid the "fiscal cliff" in January, as well worry about the euro zone crisis, have weighed on the outlook for demand for much of the fourth quarter, countering bullish concerns that Middle East unrest could reduce oil supplies.
Even as President Barack Obama threatened to veto a Republican tax plan as talks to avert a budget crisis by the end of the year turned sour despite recent progress, both sides appeared confident a deal remained within reach.
"There was a risk-on tone when we started the day globally. All markets were looking to go higher, and I think crude has fed off that," said Addison Armstrong, director of market research, Tradition Energy in Stamford, Connecticut.
"You have a lot of good upside momentum going."
World shares rose to a 17-month high, with U.S. crude finding additional momentum after the release of data from the U.S. Energy Information Administration showing fuel demand hit the second highest level for the year last week, while crude and heating oil inventories fell.
Brent February crude rose $1.52 to settle at $110.36 a barrel in the biggest one-day gain since Nov. 19. The front-month contract pushed above the 50-day moving average Of $109.79 and briefly topped the 200-day moving average of $110.39, technical levels closely watched by traders.
U.S. crude led the gains in the oil complex, however, with the U.S. January crude contract trading up $1.58, or 1.8 percent, to settle at $89.51 a barrel, marking the biggest gain in the front-month contract since Nov. 29.
With the January contract set to expire at the end of the session, the more actively traded February crude also gained $1.58, settling at $89.98 a barrel, after trading as high as $90.33.
U.S. RBOB gasoline rose nearly 2 percent, taking gains for the front-month contract over the past two sessions to over 3 percent and marking the biggest two-day gain since Nov. 9. Gasoline traders have been closely watching for the restart of the 325,000 barrel per day (bpd) crude unit at Motiva Enterprises' Port Arthur, Texas refinery.
Repairs at the unit, which was shuttered shortly after it was launched earlier this year due to pipe problems, were expected to be completed on Sunday after a leak triggered a fire on Monday, according to sources familiar with operations.
Oil found further support from the improving outlook for the euro zone economy after Germany's Ifo economic research institute said its business climate index rose to 102.4, higher than the forecast of 102.0.
"Germany didn't disappoint - the Ifo business sentiment reading sent a strong signal highlighting again the dynamism of the German economy and the potential to support the euro zone recovery next year," said Gekko Markets trader Anita Paluch.
Adding to positive sentiment was data showing U.S. homebuilding permits touched their highest level in nearly 4-1/2 years in November.
Simmering tension in the Middle East, which has underpinned prices during the year, also helped push oil higher.
Iran has said it will not stop its higher-grade uranium enrichment in response to external demands, signalling a tough bargaining stance ahead of planned new talks with world powers.
Israel has threatened air strikes on Iran if its nuclear work is not curbed through diplomacy or sanctions, keeping concerns about potential oil supply disruption in focus and the threat of a Middle East war damaging to the global economy. (Reporting by Robert Gibbons and Matthew Robinson in New York, Manash Goswami and Florence Tan in Singapore and Sudip Kar-Gupta, Shadia Nasralla, David Sheppard and Simon Falush in London; editing by Andrew Hay and Alden Bentley)