Brent crude rose towards $110 a barrel on Monday as escalating violence in the Middle East fuelled concerns over oil supplies from the region and as hopes rose that a U.S. budget crisis could be averted.
Investors fear the Israeli-Palestinian conflict may draw in other countries and possibly disrupt energy exports from the region, which supplies more than a third of the world's crude.
Risk analysts say it is unlikely the confrontation between Israel and Gaza will spill out into a wider conflict, but investors are wary, knowing previous Middle East wars have led to oil embargoes and temporary disruptions to energy supplies.
Brent futures for January climbed $1 to $109.95 before slipping slightly to trade around $109.70 by 0900 GMT. U.S. crude oil rose $1.07 to a high of $87.99 before easing back to trade around $87.80.
"Violence in the Middle East is certainly supporting oil," said Carsten Fritsch, senior commodities analyst at Commerzbank in Frankfurt. "Hopes for a solution to the crisis over the U.S. budget are also providing support for all financial markets."
Ten civilians and two members of the Islamic Jihad faction were killed and at least 30 other Palestinians were hurt in air strikes on Monday, hospital officials said, bringing the death toll from six days of clashes in Gaza to 85.
United Nations Secretary General Ban Ki-moon was due to arrive in Cairo on Monday to support ceasefire efforts led by Egypt, which borders both Israel and Gaza and whose Islamist-rooted government has been hosting leaders of Hamas.
Israel has authorised the call-up of 75,000 military reservists and speculation has mounted that Israeli Prime Minister Benjamin Netanyahu may order a ground offensive, a move diplomats say could result in many more casualties in Gaza.
Financial markets also found support from expectations that U.S. politicians would be able to avoid a budget crisis, helping support growth in the world's biggest oil consumer.
A deal has to be agreed before January when a "fiscal cliff" - more than $600 billion in tax increases and spending cuts - will kick in and could push the U.S. economy back into recession.
Top lawmakers emerged from a meeting with President Barack Obama on Friday confident of finding common ground on taxes and spending to help them avert the disastrous situation.
"Stock markets and commodities markets are hoping a U.S. budget deal can be found," said Commerzbank's Fritsch. "So markets are in a 'risk on' mode."