US light crude for September delivery gained $6, or 5.2%, to $121.56 a barrel by 21:30 pm IST, the biggest percentage gain since June 6. London Brent crude too climbed by $6.11 to $120.47 a barrel.
"There's a myriad of geopolitical factors rumbling in the background Russia, Iran," said Tony Machacek, broker at Bache Commodities, adding "Also, the dollar is weaker."
The US and Poland signed on Wednesday to station parts of a US missile defence shield on Polish soil, drawing a sharp response from Russia, the world's second-largest oil exporter. The pact comes as relations between Russia and the West have been strained by Moscow's military intervention in Georgia. The conflict there has disrupted the transit of Azeri oil through Georgia.
The spat adds to political factors that have supported oil prices in recent months, such as the dispute over Iran's nuclear program and repeated militant attacks on oil facilities in Nigeria. International tension outweighed a US government report that Wednesday showed crude inventories rose by 9.4 million barrels, the largest weekly increase since March 2001.
Oil has fallen from a record high of $147.27 a barrel reached last month on evidence that demand is slowing, but prices remain up about 20% so far this year and have climbed from below $20 in early 2002. Also supporting the market was concern that Tropical Storm Fay might re-enter the Gulf of Mexico over the weekend, affecting oil refineries and offshore platforms.
Dealers were also concerned that the Organisation of the Petroleum Exporting Countries and Saudi Arabia, its top producer, may decide to trim supply in a bid to stem a further price fall. Saudi Arabia boosted oil output in July to 9.7 million barrels a day from 9.5 million bpd in June, far above the country's informal Opec target. The oil cartel meets on September 9 to review output policy. "As prices drop, Saudi Arabia may cut back on its recent increase in production, which could halt the most recent price decline," the US Energy Information Administration said in its weekly review of the market.