Oil topped $100 a barrel for the first time in three weeks on Tuesday as tension over Iran increased concerns about threats to supply and as investors bet on further policy action to support global economic growth.
Iran said on Tuesday it had successfully tested missiles capable of hitting Israel in response to threats of military action against the country. A European Union embargo against Iranian oil took full effect on Sunday.
Brent crude was up $2.31 to $99.65 a barrel by 1236 GMT after climbing as high as $100.17 intraday, trading above $100 for the first time since June 11. U.S. crude rose by $1.95 to $85.70.
"The recovery has been aided by supply-side risks, which until recently tended to be overlooked," Carsten Fritsch, an analyst at Commerzbank, said.
"Not even weaker data such as the U.S. ISM manufacturing index have checked oil's advance. The situation would have been different a week ago, suggesting a change of mood on the commodity markets."
Even after the rally, Brent oil is still down 22 percent from its 2012 high of $128.40 reached on March 1. Prices in the second quarter posted their biggest quarterly drop since the 2008 financial crisis.
The euro zone debt crisis and weak economic data from the top two consumers of oil, the United States and China, have fuelled expectations of government measures to ease monetary policy, which gave a lift to European shares on Tuesday.
The European Central Bank is expected to cut interest rates to a record low on Thursday.
Reports this week, including from the American Petroleum Institute later on Tuesday, may show a further drop in U.S. crude inventories on production cuts in the Gulf of Mexico because of Tropical Storm Debby.
Analysts in a preliminary Reuters poll expected a 2.2 million barrel drop in stocks.
Iran's latest threat on Monday to disrupt oil shipping through the Strait of Hormuz also supported prices.
Its National Security and Foreign Policy Committee drafted a bill to try and stop oil tankers from passing through the strait to countries that support sanctions against it.
Iranian threats to block the waterway have increased in the past year amid tightening Western sanctions over Tehran's nuclear work, which Iran says is peaceful and the West suspects is aimed at weapons development.
About 17 million barrels a day of oil - almost a fifth of global production - from the top Middle East producers sailed through the narrow strait in 2011.
Coinciding with the start of the EU Iranian oil ban, Iran on Sunday announced the missile tests and threatened to wipe Israel "off the face of the earth" if the Jewish state attacked it.
"Iran is always a factor and it has the potential to have a dramatic impact on oil prices," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney.
"Traders are also expecting to see a policy response from China and a potential for more stimulus from the U.S. Federal reserve to support the economy."
In Norway, an oil and gas workers' strike has started to slow crude shipments from the world's eighth-largest oil exporter, although unions on Tuesday decided against escalating the action for now.
The strike has led to a delay in the export of a cargo of Oseberg crude, according to a trading source. Oseberg is part of the North Sea dated Brent benchmark used as the basis for many of the world's trades. (Additional reporting by Ramya Venugopal and Jessica Jaganathan, editing by Jane Baird)