Oil rose to a one-month high above $96 a barrel on Wednesday ahead of a U.S. government report expected to show crude inventories in the world's top consumer fell for a sixth straight week.
Prices also gained as Turkish war planes bombed Kurdish guerrilla targets in northern Iraq on Wednesday, a reminder to investors of risks to crude supplies in the Middle East.
U.S. crude rose $1.94 to $96.07 a barrel by 9:55 a.m. EST, the highest level since late November. London Brent was up $2.02 at $94.72. Volume remained light due to the holiday in the United Kingdom.
U.S. inventory data, to be released on Thursday, a day later than normal due to the Christmas holiday, is expected to show crude stocks fell by 1.8 million barrels as bad weather in Texas and the Gulf slowed imports.
Crude stockpiles in the United States are already at their lowest level in nearly three years, stoking fears of a winter supply crunch.
Adding support, the Turkish military said its offensive against outlawed separatist Kurdistan Workers Party (PKK) guerrillas inside Turkey and across the border in northern Iraq would continue.
Further Turkish military efforts against the PKK rebels keeps the geopolitical pot boiling in that oil flows from Iraq could potentially be disrupted, Mike Fitzpatrick, vice president at MF Global, wrote in a research note.
Oil supplies from Iraq's pipeline to Turkey are sporadic because of technical problems and sabotage. Most of Iraq's oil is exported from the country's southern ports.
IN A RANGE
Oil has been holding in a range below the all-time peak of $99.29 reached last month as dealers weigh tightening inventories against the threat that an economic slowdown will cut consumption.
Forecasters, including the International Energy Agency and producer group OPEC, have cut projections for world oil demand growth in 2008.
Besides concern about the economy, oil has also been pressured by forecasts of warmer-than-usual U.S. winter weather, which would curb demand for heating fuel.
U.S. heating demand will be 17 percent below normal in the week ending December 29 as temperatures rise above average in most of the key heating regions, according to the National Weather Service.
Even so, oil in New York is up more than 50 percent since January, the biggest gain since 2002. The price has averaged around $72 this year, up from $66.25 in 2006.
A Reuters poll showed analysts expect oil prices to average above $77 a barrel next year as tight OPEC supplies and Middle East tensions outweigh concerns about a sluggish U.S. economy.