SINGAPORE Brent crude held steady above $111 a barrel on Tuesday, less than a dollar off a one-month top hit in the previous session, on hopes a U.S. budget crisis will be averted and on supply worries triggered by tension in the Middle East.
Global stock markets and commodities rallied on Monday, boosted by expectations for U.S. lawmakers to reach a deal to avert $600 billion in tax increases and spending cuts due to start in January - the "fiscal cliff" that threatens to send the U.S. economy back into recession.
Oil prices found additional support from the growing Israeli-Palestinian conflict.
Brent crude edged down 11 cents to $111.59 per barrel by 0501 GMT, 61 cents away from the previous session's one-month top of $112.20. U.S. crude fell 21 cents to $89.07.
"The overnight rally in the U.S. equity market is still supporting the oil market, with ongoing tension in the Gaza Strip posing some geopolitical risks," said Natalie Rampono, a commodity strategist at ANZ.
"Even though the violence is not near oil-producing nations, the consensus is that it could lead to tension in the region ... so I'm surprised that prices haven't rallied like they did in the past."
Big armoured bulldozers with blades tall enough to plough through houses and carve a path for tanks and infantry were lined up on Israel's border with Gaza on Monday, ready to invade if given the order.
Investors are waiting to find out if it will be truce or war. Mediator Egypt says a deal to end the fighting could be close. Israel says it is prepared to move troops into Gaza but prefers a diplomatic solution.
Optimism that debt-laden Greece will get more funding also helped brighten the outlook for oil demand, but price gains were checked as the euro fell after rating agency Moody's stripped France of its prized triple-A rating.
A stronger dollar makes commodities priced in the greenback less appealing to holders of other currencies.
"While there was not much news to trigger the rally, there are a lot of nervous investors who are underweight equities and other risk assets," Ric Spooner, chief market analyst at CMC Markets said in a note on Tuesday, referring to Monday's rally.
"Investors in this situation are very conscious of the positive event risk represented by a good outcome on the fiscal situation and the Greek government being successfully funded. In this situation, rising prices themselves attract investors nervous about missing out on a major rally."
Euro zone finance ministers will give a tentative go-ahead for the disbursement of 44 billion euros in emergency loans to Greece on Tuesday, but the money will only be paid on December 5 if the country meets all remaining conditions.
Promising data from the United States, the world's top oil consumer, also helped keep oil prices near the peak reached in the previous session.
U.S. home resales rose in October and a gauge of homebuilder sentiment climbed to a six-year high in November, signs of surprising vigour in the country's still-struggling housing market.
Traders are now eyeing U.S. oil inventory data. A Reuters poll of analysts showed U.S. crude oil stockpiles were expected to have risen by 900,000 barrels in the week to November 16.
(Editing by Clarence Fernandez)
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