Brent crude oil rose above $108 a barrel on Tuesday on signs of progress in talks to resolve a U.S. budget crisis, easing fears the world's top oil consumer could tip into recession.
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President Barack Obama made an offer to Republicans that included a major shift in position on tax hikes for the wealthy, leaving lower tax rates in place for everyone earning less than $400,000, a source familiar with the talks said.
Oil and other riskier assets rose after the U.S. president moved away from the $250,000 threshold that Democrats have been demanding for months.
Gains were kept in check after Republicans indicated they would continue to push for tax hikes to be limited to those earning more than $1 million.
Brent crude rose 60 cents to $108.24 a barrel by 1520 GMT. U.S. crude oil gained 31 cents to $87.51 a barrel. In early trade, it climbed above the 50-day moving average, a key technical indicator watched by traders.
"Today there is optimism that we'll see the resolution to the U.S. fiscal cliff, which drives up markets in general," said Bjarne Schieldrop, chief commodity analyst at SEB in Oslo.
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"Even if we haven't seen a solution yet, the optimism is there."
Brent crude has traded between $104 and $112 since November, pressured by concerns the United States will not reach a deal on the so-called "fiscal cliff" before the end of the year, triggering automatic tax hikes and spending cuts.
A vote on a U.S. House of Representatives Republican plan to avert the fiscal cliff could come as early as this week, according to Republican lawmaker Eric Cantor.
The possible end to the stalemate comes as recent data points to a revival in demand in China, the world's second-largest oil consumer.
The oil minister of Saudi Arabia said the market was well balanced, with prices above $100 a barrel, a level the world's largest exporter has tried to achieve by adjusting production levels over the past two years.
"Supply is plentiful, demand is good," Ali Al-Naimi said in an interview in Seoul.
"Nobody is complaining about high prices or low prices. They are no longer sky-rocketing or falling down."
Average Brent crude prices have been relatively stable over the past two years, though they have at times spiked towards $120 and above as supplies from the Middle East have been disrupted by the Arab Spring and as Western sanctions have cut Iranian oil exports.
Brent is on course to average just under $111.70 a barrel in 2012 after an average of $110.91 in 2011.
Also helping to support oil prices, the dollar index was down around 0.1 percent, hitting a two-month low against a basket of currencies. Weakness in the U.S. currency tends to support dollar-priced commodities.
SPREAD NARROWS, SEAWAY EYED
The price difference between Brent and U.S. crude oil <CL-LCO1=R> held around $20 a barrel after narrowing by more than $2 on Monday on news that an expanded pipeline between Cushing, Oklahoma, and Houston, Texas, will start operating next month.
Enterprise Products Partners LP and partner Enbridge Inc said the Seaway Pipeline would expand to 400,000 bpd by early January and 850,000 bpd in 2014.
A rapid expansion in U.S. oil production through advances in horizontal drilling and hydraulic fracturing, commonly referred to as "fracking", has led to a glut of crude around Cushing, the delivery point of the U.S. crude oil future.
This has contributed to its heavy discount to Brent, which widened to more than $25 per barrel last month. The increased pipeline capacity will allow more crude to flow from Cushing to the Gulf Coast, where it fetches prices closer to Brent.
Meanwhile, a drawdown of inventories by U.S. refineries for year-end tax purposes may result in a lower reading for data on stockpiles due on Tuesday, a Reuters poll showed. Crude stocks are expected to have dropped by 1 million barrels in the week ended Dec. 14, the poll showed.
In the Middle East, Iraqi President Jalal Talabani suffered a stroke and was in a "critical but stable condition" in a Baghdad hospital.
Mediation by Talabani recently helped reduce friction between Prime Minister Nuri al-Maliki's central government and the autonomous Kurdistan region's president, Masoud Barzani, in a dispute over oilfield rights.