Brent crude rose above US$108 a barrel on Tuesday as the outlook for oil demand improved on signs of progress in US talks to resolve a budget crisis that threatens to dip the world's top oil consumer into recession again.
Optimism that the US "fiscal cliff" tussle could be settled before tax hikes and spending cuts kick in early next year boosted riskier assets after President Barack Obama made an offer to Republicans that included a major change in position on tax hikes for the wealthy.
"Oil is tracking the positive reaction in equities from New York to Asia over hopes of a resolution of the US fiscal crisis," said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investment.
US oil is drawing support from news of an expansion in the pipeline capacity in the United States that may help narrow the spread between the two contracts, Emori said.
Brent crude rose 76 cents to US$108.40 a barrel by 0531 GMT. US oil gained 64 cents to US$87.84, rising for a third straight day on hopes the Seaway pipeline expansion may help soak up the crude glut in the delivery hub of the futures contract.
A resolution to the so-called US fiscal cliff may help support oil prices, which have been capped, with Brent trading between a high of US$112 and a low of US$104 since November, in part because of an uncertain demand outlook.
"The market will view any advance in talks as positive for confidence which has been battered by the daily flow of political fighting," Ben Taylor, sales trader at CMC Markets said in a report. "Regardless of what is decided, the market is looking for a decision and any compromise will help provide a clearer picture for the future."
The differences over how to resolve the "fiscal cliff" narrowed significantly Monday night as, in its most dramatic position change yet, the White House proposed leaving lower tax rates in place for everyone except those earning US$400,000 and above, a source familiar with the talks said.
That's up from the US$250,000 threshold the president has been demanding for months, but still far from Republican House of Representatives Speaker John Boehner's preference of US$1m.
The possible end to the stalemate comes as data points to a revival in demand in China, renewing investor optimism over the world's top two oil consumers.
"We have also seen an improvement coming from China. Their refinery output is increasing and that is leading to higher imports," Emori said. "That is also supporting prices."
Brent is expected to rebound to US$109.02 per barrel, as it did not break a support at US$107.54, while US oil may break a resistance at US$87.77 and rise into a range of US$88.28 to US$88.37, Reuters technical analyst Wang Tao said.
The spread between the two contracts fell by more than US$2 on Monday to about US$20 per barrel on news that a pipeline to transport crude between Cushing, Oklahoma, and Houston, Texas, will be expanded starting next month.
Enterprise Products Partners LP and partner Enbridge Inc said they plan to expand the 150,000 barrel per day Seaway pipeline to 400,000 bpd by next month and to 850,000 barrels a day of crude by early 2014.
A glut of crude in Cushing has contributed to the heavy discount of U.S. West Texas Intermediate (WTI) crude futures to Brent which widened to more than US$25 per barrel last month.
The increased capacity will allow more crude from Cushing to the Gulf Coast, where it fetches prices closer to Brent.
Meanwhile, a drawdown of inventories by US refineries for year-end tax purposes may result in a lower reading for stockpiles data due on Tuesday, a Reuters poll showed.
Crude stocks may have dropped by 1m barrels in the week ended December 14, the poll showed.