Oil rose to near $103 a barrel on Friday as signs of an improving U.S. economy fueled investor confidence and a global stock market rally.
Optimism about a bailout deal for Greece and continued tensions with Iran also supported oil prices.
By early afternoon in Europe, benchmark crude was up 48 cents to $102.79 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 52 cents to settle at $102.32 per barrel in New York on Thursday.
In London, Brent crude was down 11 cents at $120 per barrel on the ICE Futures exchange.
Crude has jumped from $96 earlier this month as a surge in stock markets suggests investor confidence in the U.S. economic outlook is improving. The U.S. Labor Department said weekly applications for unemployment benefits dropped for the fourth time in five weeks to the lowest point since March 2008.
The Dow Jones industrial average rose 1 percent Thursday to its highest level in almost four years while Asian and European stocks were up on Friday.
Rising fears that a military conflict will erupt over Iran's nuclear program and block oil supplies from reaching markets has also helped push crude prices higher.
The U.S. and Europe are tightening economic sanctions against Iran over what the West believes is Iran's attempt to build a nuclear bomb. World leaders fear Israel may be planning a strike against Iran.
In response, Iran, which is the world's third largest exporter, has threatened to withhold its own oil deliveries and to block the Strait of Hormuz, through which one-fifth of the world's oil flows.
"Given the headlines regarding Iran, the market appears to be entering panic mode," energy traders and consultant The Schork Group said in a report. "In this current sky-is-falling market, facts like weak demand relative to supply are overshadowed by fear and greed. Bottom line, this oil market is afraid, very afraid."
Some analysts are starting to worry that rising fuel costs will undermine consumer spending and stymie economic growth. At about $3.50 a gallon, the average U.S. price for gasoline is 38 percent higher than a year ago and likely to raise into the summer, said Carl Larry of energy consultant Oil Outlooks and Opinions.
"We all have to wonder now if that's going to have a deteriorating effect on the current growth of America," Larry said. "The question now is will America be ready for this shock?"
Markets were also boosted by hopes that Greece will be able to reach an agreement with creditors on Monday about its second bailout and a debt writedown, but analysts recommended prudence.
"Investors should remain cautious as the situation in the eurozone continues to look fairly gloomy, despite the recent optimistic signs that improve market sentiment and increase risk appetite," said a report from Sucden Financial in London.
In other energy trading, heating oil was down 1.18 cents to $3.1979 per gallon and gasoline futures fell 0.87 cent to $3.0384 per gallon. Natural gas added 9 cents to $2.657 per 1,000 cubic feet.
Alex Kennedy in Singapore contributed to this report.
- New York Mercantile Exchange