Oil hit a 12-week high near $80 a barrel on Monday as robust corporate earnings fueled optimism over the strength of the global economic recovery and the outlook for energy demand.
European stock markets hit a 3-month high as risk appetite across commodity and financial markets picked up following strong results from leading banks HSBC (HSBA.L) BNP Paribas (BNPP.PA).
U.S. September crude rose 93 cents to $79.88 a barrel by 6:30 a.m. ET, just off the intra-day peak of $79.90, the highest price since May 6.
ICE Brent earlier rose $1.09 cents to $79.27, the highest level since June 21.
The U.S. dollar fell against a basket of currencies .DXY on Monday as investors moved to riskier assets, helping to support oil prices. A weaker greenback makes commodities cheaper for some holders of alternative currencies.
The growing optimism among speculative investors on the outlook for longer-term oil prices was evident in data from the Commodity Futures Trading Commission (CFTC) on Friday.
Money managers increased net long crude oil positions, bets that prices would rise, to the highest level since May on the New York Mercantile Exchange in the week to July 27, the CFTC said.
Long positions are starting to creep back into the market, said Ben Westmore, a commodities analyst at National Australia Bank in Melbourne.
It's a gradual process of regaining confidence that there is not going to be a default soon, he added, in a reference to the euro zone's debt crisis.
A tropical cyclone forming in the mid-Atlantic also lent support to oil prices as the hurricane season enters what in recent years has been a period of peak activity between August and early October. Atlantic storms sometimes enter the Gulf of Mexico, posing a threat to U.S. and Mexican oil infrastructure.
The U.S. National Hurricane Center (NHC) said late on Sunday that a tropical depression may be forming in the mid-Atlantic, assigning a 90 percent likelihood that the system may become a tropical depression within the next day or so.
Despite Monday's gains, some analysts warned the latest oil price rally may be short-lived if investors focus on the weak fundamental outlook following lackluster economic data.
I don't see a reason for anymore significant rise in oil prices and today's gains could easily be wiped out, said Christophe Barret, oil analyst at Credit Agricole.
Fundamentals have not improved when you look at Chinese and U.S. economic indicators they look pretty weak, Barret added.
China's official purchasing managers' index (PMI) fell to a 17-month low in July of 51.2 from 52.1 in June, the China Federation of Logistics and Purchasing (CFLP) said on Sunday.
The PMI is designed to provide a timely snapshot of business conditions and a figure above 50 indicates expansion.
On Monday, an index based on a nationwide survey of business executives conducted for HSBC showed Chinese manufacturing shrank in July for the first time since the global downturn in March 2009 on government steps to slow bank lending and fight property speculation.
Meanwhile, data on Friday showed that U.S. gross domestic product expanded at a 2.4 percent annual rate, missing expectations for growth of 2.5 percent, after an upwardly revised 3.7 percent growth pace in the first quarter.
Attention this week will remain on U.S. economic data, with the Institute for Supply Management manufacturing index expected later on Monday, followed by July payrolls on Friday.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by James Jukwey)