Traders attributed the rapid gain to buying at a key technical support level and possible algorithmic short-covering. Brent crude held most of those gains by mid-morning, up $1.76 or 1.6 percent at $110.56 a barrel by 10:30 a.m. EST (1530 GMT), on track for its biggest one-day rise since mid-November. Volume was about one-sixth the average. Markets were mostly flat on Monday, the last trading day before Christmas.
US crude led Wednesday's gains, up $2.17 from Monday's close to $90.77 a barrel, but trading activity remained subdued. About 150,000 lots had changed hands, roughly a third of the daily norm. Oil prices dropped more than 1 percent on Friday after US fiscal talks dissolved when Republican lawmakers withheld support for a proposal to avert a raft of tax hikes and spending cuts, but many investors doubt that lawmakers would risk tipping the fragile US economy into recession again.
President Barack Obama will cut short his Christmas holiday to return to Washington early on Thursday to resume talks. In the meantime, traders turned to the charts for inspiration. Friday's intraday low for WTI crude was a major 50 percent retracement mark, and $88 a barrel was a "big level that a lot of people were watching", said Bill Baruch, senior market strategist at iitrader.com LLC in Chicago.
Prices have now broken above the 100-day moving average for the first time since October, a move that could set up a test of the 200-day mark at $92.20 a barrel - if the first break holds. "The market is taking advantage of thin holiday trading, boosting out of its trading range. It's thin volumes and technical trading," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
Financial markets showed little reaction to US data that revealed a slightly stronger-than-expected rise in single-family home prices, with most eyes still on Washington. US stock markets declined by 0.3 percent. Colder US weather is set to boost demand. Frontier Weather said the Northeast could see sharply below-normal temperatures in the first half of next week, after a powerful storm now traversing the Midwest passes through the region.
Heating oil prices, which have tumbled relative to crude over the past two months due to unusually warm winter conditions, tracked Brent's gains on Wednesday. Gasoline futures outperformed, rising 2.3 percent to extend a three-week rally as traders anticipated refinery maintenance that will constrict supplies in the US Northeast. Oil was also supported by expectations Japan's new prime minister will pursue drastic stimulus policies to drive the economy of the world's third-largest oil consumer out of deflation.
Shinzo Abe was voted in as prime minister by parliament's lower house on Wednesday, giving the hawkish lawmaker a second chance at Japan's top job. The yen fell to a 20-month low against the dollar on Wednesday, buoying the benchmark Nikkei stock average to nine-month highs.
Oil also found support from tensions in the Middle East. International envoy Lakhdar Brahimi pursued mediation efforts in Damascus on Tuesday, but there was no pause in the bloodletting in Syria. Syrian President Bashar al-Assad sent a senior diplomat to Moscow on Wednesday to discuss Brahimi's proposals. More than 44,000 Syrians have been killed since a revolt erupted 21 months ago, and government shelling killed more people on Wednesday. Security forces in the United Arab Emirates have arrested a cell of UAE and Saudi Arabian citizens that was planning to carry out militant attacks in both countries and other states, the official news agency WAM reported.