Brent crude oil rose by more than $1 to reach $111 per barrel on Thursday on optimism that U.S. lawmakers would reach a deal on fiscal policy and as mounting tension in the Middle East intensified supply concerns.
Brent crude was up $1.15 at $110.66 a barrel by 1210 GMT, having hit a session high of $111.00 while U.S. crude gained $1.07 to $87.56 a barrel, following losses in the previous session.
Demand sensitive assets were boosted on improved sentiment about a deal on U.S. budget talks, with President Barack Obama suggesting he was optimistic about concluding discussions before Christmas.
The United States is the world's biggest crude oil consumer.
However Michael Hewson, analyst at CMC Markets cautioned that the optimism may be short-lived.
"It's too early to start declaring victory. There's a long way to go, and there will be plenty more twists and turns and trading will continue to be choppy."
Fears of escalating violence in Egypt and worries about mounting tension elsewhere in the Middle East have revived concerns that supply from the region may be disrupted.
Egyptian President Mohamed Mursi will address the nation at 1700 GMT, calling for unity as he pushes through a new constitution but critics said the Islamist-dominated assembly's bid to finish the constitution quickly could make matters worse.
The death of a Saudi diplomat and his Yemeni bodyguard in Yemen's capital Sanaa on Wednesday, and comments from Iran that it was determined to press on with uranium enrichment ahead of possible talks with world powers, also supported oil.
Israel and its Western allies accuse Iran of trying to develop a nuclear bomb, while Tehran insists its nuclear programme is purely for civilian use.
OPEC, PRICE POLL
High oil stockpiles, slowing demand growth and a fragile world economy would usually give OPEC reason to consider supply cuts when it meets next month, especially when some think they may be pumping more than enough to meet demand.
A fall in U.S. crude oil stockpiles added to the more bullish tone. Inventories fell 347,000 barrels in the week to Nov. 23, to 374.12 million barrels, after analysts polled by Reuters had forecast a build of about 300,000 barrels.
U.S. gasoline stockpiles rose a sharp 3.87 million barrels to 204.26 million barrels, compared with expectations for a smaller 900,0000 barrel build.
Oil prices are expected to fall slightly over the next year as high production feeds softening demand at a time of slowing global economic growth, a Reuters poll shows.
Reuters' monthly oil price survey of 29 analysts forecasts North Sea Brent crude oil will average $107.50 per barrel in 2013, down $1.30 from the forecast in the October poll and compared with an average of around $111.90 so far in 2012.
"Our overriding outlook continues to foresee slowing global growth (which) consequently should persist in undermining (oil)demand," Gain Capital Group analyst Chris Tevere said.
Investors will await third quarter U.S. GDP data at 1530 GMT for more clues on the growth outlook, which the market is expecting to be revised upwards to an annualised rate of 2.8 percent. (Additional reporting by Luke Pachymuthu in Singapore; editing by James Jukwey)