Brent crude rose above US$111 per barrel on Tuesday as optimism coursed through financial markets after Greece's international lenders reached a deal on a new debt target, although worries about a looming US fiscal crisis kept a lid on gains.
The euro hit a one-month high and Asian shares climbed for a seventh straight day after euro zone finance ministers and the International Monetary Fund agreed on a package of measures to reduce Greek debt needed to release another tranche of loans to the near-bankrupt economy.
Brent crude was up 16 cents at US$111.08 a barrel by 0510 GMT and US crude gained 30 cents to US$88.04, following losses on Monday.
Oil prices were also supported by a softer dollar, which makes commodities priced in the greenback cheaper for holders of other currencies.
But traders cautioned that price gains may be checked as the longer-term outlook for Europe remained uncertain.
"Markets for now are pricing in that Greece will be refunded, but there are structural problems about the euro zone that needs fixing," said Ben Taylor, sales trader at CMC Markets in Sydney.
"It's amazing how [Europe] keeps finding ways to buy themselves more time. They've simply kicked the can down the road for the moment."
Market attention is now expected to focus on the fiscal policy standoff in the United States. A lack of progress on that front will muddy the outlook for demand from the United States, the world's top oil consumer.
Republicans in the US Congress on Monday called on President Barack Obama to detail long-term spending cuts to help solve the country's fiscal crisis, while holding firm against the income tax rate increases for the wealthy that Democrats seek.
While Congress returned from its Thanksgiving holiday break amid increasing talk about long-term tax reform plans and a need to compromise, the two parties showed no signs yet of having found a way around the short-term tax obstacle necessary to head off the fiscal cliff on December 31.
"If we do hit the fiscal cliff, the US will dip back into a recession which is not good for anyone," Taylor said.
The fiscal cliff's approximately US$600bn in tax hikes and spending cuts that would begin in 2013 would push the US economy back into recession, according to the non-partisan Congressional Budget Office.
"We do see markets, at least for now still pricing in some kind of agreement to take place before the end of the year, but we're going to have to see compromise from both parties."
The oil market is also keeping an eye on the political crisis in Egypt that has triggered worries about supply.
Opponents of Egyptian President Mohamed Mursi will press ahead with a protest on Tuesday to demand the scrapping of a decree extending his powers, rejecting the Islamist's attempt to defuse a crisis that has brought violence back to Cairo's streets.
Mursi was accused of giving himself the powers of a modern-day pharaoh when he issued the decree last week that prevents legal challenges to any decision he takes until a new parliament is elected.
News that OPEC member Nigeria is expected to see oil exports drop to 1.98m barrels per day in January from a planned 2.12m bpd in December also supported crude.
Traders are now waiting for weekly US inventory data due out on Tuesday and Wednesday. Analysts forecast a build in crude and refined product stockpiles for the week to November 23.