Brent crude was steady near $110 per barrel on Wednesday after an early rise spurred by fears of supply disruption from the Middle East, as clashes raged between Palestinians and Israelis despite overnight truce talks.
But prices fell back as worries over oil demand took centre-stage after euro zone finance ministers ended a meeting in Brussels on Wednesday without agreement on the next tranche of loans to Greece.
Concerns on the U.S economy also weighed on oil prices as Federal Reserve Chairman Ben Bernanke warned that failure to resolve a budget crisis could lead to recession in the world's biggest consumer of crude.
Brent crude futures were up 15 cents at $109.98 a barrel by 0635 GMT, off an earlier session-high of $110.55. U.S. crude rose 19 cents to $86.94.
"There are opposing forces where the uncertainty in Europe and the United States meets with the bullish uncertainty in the Middle East ... so I think we're going to see a volatile market," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.
"We're going to see some crazy volatility in the market with rising geopolitics and rising economic uncertainty. The Middle East tensions could continue to give prices some life in the near term but we suspect that bearish economic factors will be dominant."
MIDEAST VIOLENCE, FISCAL FEARS
Adding to geopolitical risks, the United States on Tuesday blocked a U.N. Security Council statement condemning the escalating conflict between Israel and the Palestinians in the Gaza Strip, setting the scene for a possible showdown between Washington and Russia on the issue.
Israeli air strikes shook Gaza and Palestinian rockets struck across the border as U.S. Secretary of State Hillary Clinton held talks in Jerusalem in the early hours of Wednesday, seeking a truce that can hold back Israel's ground troops.
Hamas, the Islamist movement controlling Gaza, and Egypt, whose new Islamist government is trying to broker a truce, had floated hopes for a ceasefire by late Tuesday; but by the time Clinton met Israeli Prime Minister Benjamin Netanyahu it was clear there would be more argument, and more violence, first.
The violence in the Middle East adds to investors' worries about the economic outlook for the U.S. and Europe.
Greece's international lenders failed for the second week running to agree how to get the country's debt down to a sustainable level and will have a third go at resolving their most intractable problem in six days' time.
After discussing myriad options in nearly 12 hours of talks through the night, euro zone finance ministers, the International Monetary Fund and the European Central Bank failed to reach a consensus needed to disburse emergency aid to Athens.
That comes a day after Moody's stripped France of its prized triple-A badge, citing uncertainty about the fiscal and economic outlook of the euro zone's second-largest economy.
But he Fed's Bernanke also said 2013 could be a "very good year" for the U.S. economy if politicians can strike a quick deal to avoid the so-called fiscal cliff of spending cuts and tax hikes.
"In the U.S., politicians are starting to say the right things but we do not appear to be on the doorstep of anything resembling a concrete solution just yet," said Tim Waterer, a senior trader at CMC markets in a note.
"In Europe, the path towards the next tranche of aid for Greece is not looking entirely smooth."
Recent U.S. housing and oil inventory data, however, helped support prices.
U.S. housing starts rose to their highest rate in more than four years in October, suggesting the housing market recovery was gaining steam.
U.S. crude oil inventory tumbled last week due to a drop in imports, data from the American Petroleum Institute released on Tuesday showed. Total U.S. crude stocks fell by more than 1.9 million barrels in the week to November 16, after analysts polled by Reuters had forecast a build of 900,000 barrels.