Brent oil rose towards $110 a barrel on Wednesday on expectations that a budget crisis in the United States will be resolved, heading off a recession threat to the world's top oil consumer.
World shares rose to 17-month highs, and the euro gained on growing confidence that a U.S. pact on spending and taxes will be reached before a year-end deadline, avoiding the so called fiscal cliff which threatened to tip the country into recession.
A German business survey that showed improving sentiment among investors cemented the more upbeat mood.
Brent crude was up 96 cents to $109.80 a barrel at 1359 GMT. It was heading for its highest close in two weeks. U.S. oil gained 37 cents to $88.30.
"There's some optimism about the outlook in the United States and the dollar's a bit weaker, which is why we're trading higher despite warmer weather in Europe and a perception that supply is strong," Christopher Bellew, a broker at Jefferies Bache, said.
Along with other demand-sensitive assets, oil is being supported by a perception that once the U.S. fiscal crisis is resolved, massive monetary stimulus by the world's top central banks will lead to an expansion in economic growth for 2013.
Political manoeuvring intensified over an agreement to keep the U.S. economy from tumbling off the fiscal cliff next year as Republicans tried to wring more tax-rate concessions out of the White House.
"The divide between the two parties ... now appears to be just a hop, skip and jump away from a resolution being reached if recent market trajectory is anything to go by," Tim Waterer, a senior trader at CMC Markets in Sydney, wrote in a note.
Worries about the outlook for the euro zone economy were assuaged after Germany's Ifo economic research institute found that the 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.
Investor attention turned to stockpiles data for more clues on the demand/supply dynamic in the world's largest oil consumer.
Crude oil stocks are forecast to have fallen 1.1 million barrels after a modest rise the previous week.
The expected draw will be mainly as a result of further strength in refinery demand and a drop in imports of as much as 300,000 to 400,000 barrels per day, Jim Ritterbusch, president of Chicago-based Ritterbusch & Associates, said.
Oil may get additional support if U.S. inventory data turns out to be close to figures from an industry group, which showed a sharp drawdown.
Data from the American Petroleum Institute showed U.S. crude stocks fell more than expected in the week to Dec. 14 as imports dropped and that refined product stocks were mixed as processing rates rose.
Simmering tension in the Middle East is also keeping oil prices elevated.
Iran said it would not stop its nuclear programme in response to external demands 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, raising the spectre of a Middle East war damaging to the global economy. (Additional reporting by Manash Goswami and Florence Tan in Singapore and Sudip Kar-Gupta in London; editing by Jane Baird)