(Reuters) - Brent crude oil gained over $1 on Wednesday, snapping two days of sharp falls, on expectations that cheap loans from the European Central Bank will spur buying of riskier assets.
Fears about supply disruption from Iran also pushed prices back towards 10-month highs.
Front-month Brent rose $1.03 to $122.58 a barrel by 0926 GMT, after sliding $2.62 on Tuesday to settle at $121.55.
Brent is up 10.5 percent this month, and is on track to post its strongest monthly gains since last February, though it has retreated from highs above $125 set last week.
U.S. crude gained 56 cents to $107.11 a barrel. The contract slipped $2.01 to settle at $106.55.
The ECB is expected to pump half a trillion euros into the euro zone's troubled financial system for the second time.
"(Oil strength is due to) the situation with the ECB, but there is also chatter about the implications of any Israeli involvement in the escalating tensions with Iran," said Nick MacGregor, oil analyst at Redmayne Bentley in Henley.
Indicating that it is becoming ever more difficult for Iran to sell its in the international market, Dubai-based Noor Islamic Bank has been forced by the United States to cut off its banking business with Iran.
Iran will take payment from its trading partners in gold instead of dollars, the Iranian state news agency IRNA quoted the central bank governor as saying on Tuesday.
Iranian financial institutions have been hit by sanctions imposed by the United States and the European Union in an effort to force Tehran to halt its nuclear program.
Oil may come under pressure following comments from Energy Secretary Steven Chu that the United States is considering a release of oil from its strategic reserves.
The United States last tapped into its reserves in 2011 in coordination with other Western nations when Libya's oil production dropped because of war and prices surged. The Obama administration is under pressure to release stocks again because tensions with Iran have propelled oil markets.
South Sudan's announcement that a major rebel group with alleged links to the Sudan government had signed an amnesty deal may help ease concerns over supply.
"Reports of a truce between South Sudan and rebel groups may have removed some of the geopolitical risk premium from the market, particularly for Brent, but concerns still remain regarding Iran's slowing exports," analysts at ANZ said in a report.
South Sudan has halted oil output following a dispute with its northern neighbor.
Investors will await a report from the U.S. Energy Information Administration due at 1530 GMT, which will likely show crude oil stockpiles rose last week on higher imports, a Reuters poll found.
In a report late on Tuesday, the American Petroleum Institute said domestic crude inventories rose and oil product stocks fell as refineries cut processing rates and crude imports increased.
U.S. crude stockpiles rose by 521,000 barrels in the week to February 24, compared with analysts' expectations for a 1.1 million barrel build, according to the American Petroleum Institute. Gasoline inventories fell 916,000 barrels, the data showed, compared with forecasts for a 300,000-barrel rise.
Market players will also watch a U.S. government report on the global oil markets, which could help determine how tough the Obama administration will be enforcing sanctions against Iran and provide information it needs to combat rising oil prices.
(Additional reporting by Manash Goswami in Singapore; Editing by Alison Birrane)
