Brent crude rose above $122 on Wednesday, snapping two days of losses, in line with gains across broader financial markets on expectations that cheap loans from the European Central Bank will spur buying of riskier assets.
Asian stocks firmed and the euro held its ground as markets expect European banks to borrow about $670 billion from the ECB later in the day.
Front-month Brent rose 84 cents to $122.39 a barrel after sliding $2.62 on Tuesday to settle at $121.55. US crude gained 44 cents to $106.99 a barrel. The contract slipped $2.01 to settle at $106.55.
"Today, the market is getting ready for the ECB announcement, and is reacting to the dollar," said Ric Spooner, chief market analyst at CMC Markets.
"Overall, there is further upside potential because the market is relatively tight. There is spare capacity, but not a vast amount, so any disruption could cut into that buffer."
The dollar index slipped 0.17%. A weaker greenback makes dollar-denominated assets such as crude cheaper for holders of other currencies.
Brent is recovering from a fall, and is poised to rise more than 10% this month, the highest monthly gain since February 2011, on concerns over Iranian supplies.
US benchmark crude is on track to gain 8.6% in February, the highest since October last year.
Brent rose to near 10-month highs last week after the U.N. nuclear agency said Iran has sharply stepped up its uranium enrichment drive, but prices fell in the first two days of this week on fears the rally may strain the weakened economies of some European countries, and spread to the world.
There is further scope for oil to retreat even after Wednesday's gains because prices rose too fast, Spooner said.
"What we are seeing today is more of a repositioning ahead of the ECB announcement," he said. "There is scope for markets to correct further after the significant rise we saw recently."
Oil may also be 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.
Support
Brent will fall further to $120 per barrel, as indicated by a rising channel, while US oil will extend losses to $105.13, according to Reuters technical analyst Wang Tao.
But uncertainty over supply from Opec producer Iran and rising demand from China have put a floor on prices, in addition to a slower-than-expected increase in crude stocks and a fall in gasoline inventories in the United States.
US 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.
Japanese factory output rose more than expected in January to 2.0% and firms expect further gains, increasing confidence that demand is stabilising and manufacturing is set to return to where it was before last year's natural disasters.
