Oil rose by about USD 1 a barrel on Monday, supported by hopes European leaders will come up with solutions to the region's debt crisis and by broader gains in global markets.
Concerns about the euro zone crisis, along with a raft of poor economic US data, have dragged down oil prices this month. Hopes of a resolution to Europe's issues rose ahead of a Tuesday meeting between French and German politicians.
The optimism spread throughout markets with US stocks up more than 1%, helping offset weak US manufacturing and home builder sentiment data. The dollar weakened as investors sought riskier assets.
"It does look as if not only our (US) debt problem but also the European problem and some of the fears that drove (US oil down) to USD 75 a barrel have receded," said Gene McGillian, analyst for Tradition Energy in Stamford, Connecticut.
"Whether or not this is a temporary reprieve remains to be seen."
Brent crude oil futures for September rose 93 cents to USD 108.96 by 1:26 pm EDT (1726 GMT), after dipping earlier to USD 107.40. US crude traded up USD 1.60 to USD 86.98 a barrel.
Both crude oil benchmarks recorded their third straight weekly loss in volatile trading last week. A downgrade of US credit worthiness by ratings agency Standard & Poor's and fears that France might suffer the same fate sparked selling this month.
Trade appeared light just before 1:30 pm EDT (1730 CDT) in New York on Monday, with US crude volumes down more than 44% from the 30-day average and Brent trade about 28% below that average.
Prices took support from a rebound in global stock markets after last week's heavy losses, with data showing Japan's economy shrank less than anticipated in the second quarter following the devastating earthquake and tsunami in March.
Gains were kept in check, however, by signs of ongoing weakness in manufacturing in the United States, with the sector contracting in New York state for the third month in a row.
The survey of New York state manufacturing plants is one of the earliest regional guideposts to US factory conditions and analysts said it boded poorly for the larger national survey due at the beginning of September.
Supply threats
Brent crude oil prices are around USD 18 a barrel or 15% below the post-2008 high they hit in April of USD 127.02, as the market's focus has shifted from supply disruptions in Libya to concerns about the health of the global economy.
But prices remain supported by the loss of around 1.6 million barrels per day of production in the North African country since the start in February of an uprising against 41 years of Muammar Gaddafi's rule.
A dramatic advance on Saturday won rebels control of the town of Zawiyah, 50 km (30 miles) west of Tripoli on the coast, enabling them to halt food and fuel supplies from Tunisia.
Unnamed envoys of Gaddafi's government were reported to have held talks with rebels at a Tunisian island hotel on Sunday, on a possible resolution of the six-month-old civil war.
In Syria, where a five-month long street uprising against President Bashar al-Assad's autocratic rule has so far had little impact on the country's oil production, the military broadened its assault over the weekend to try and put down the protests.
Reports Syrian forces shelled residential districts in the city of Latakia, after assaults on Hama and the eastern city of Deir al-Zor, have been met with increasing international condemnation.
The United States wants Europe and China to consider sanctions on Syria's oil industry, a key source of hard currency for the government.
Syria produces about 400,000 barrels of oil a day, exporting about 150,000 barrels per day to European countries including the Netherlands, Italy, France and Spain.
