Crude prices increased after U.S. Secretary of State Condoleezza Rice urged Europe and Russia to bring pressure on Iran to halt uranium enrichment and come clean about its nuclear programs.
Several other factors contributed to oil's gains, including the weaker dollar, estimates that China's economy is growing faster than expected and a sense that oil has fallen too far, too fast in recent days.
Light, sweet crude for January delivery rose $1.13 to $88.62 a barrel on the New York Mercantile Exchange.
Rice's talks with European and Russian officials showed the Bush administration remains committed to isolating Iran, despite a new U.S. intelligence estimate that contradicted years of assertions that Iran is secretly pursuing atomic weapons. Energy traders worry that any conflict between the West and Iran will cut into oil supplies from the Middle East.
The dollar fell against the euro Thursday, reversing a three-day rally that contributed to recent crude price declines. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.
Also supporting oil prices Thursday was the Organization for Economic Cooperation and Development's decision to raise its forecast for China's economic growth this year to 11.4 percent from an earlier estimate of 10.4 percent. Oil prices have risen steadily since 2003 in part because of growing demand from China and India.
Analysts said there is also a sense in the market that oil prices have fallen too quickly. Crude futures opened last week over $99 a barrel, but closed below $88 a barrel on Wednesday.
"I think it was a well overdue correction," said Linda Rafield, senior oil analyst at Platts, the energy research arm of McGraw-Hill Cos. But that decline doesn't necessarily mean the bull market in oil futures is over, she said.
Wednesday's tumble came despite news that many analysts considered supportive, including OPEC's announcement that it would hold production steady rather than increase output and a government report that showed domestic crude inventories dropped sharply last week.
"We're extremely oversold at the moment," said James Cordier, president of Liberty Trading Group in Tampa, Florida. Cordier noted that many investors feel prices are still due for a run at $100 a barrel, and view prices in the high $80 range as cheap. "There's some bargain-hunting going on."
Other energy futures were also higher Thursday. Heating oil futures rose 2.37 cents to $2.513 a gallon, while gasoline futures rose 3.96 cents to $2.2566 a gallon. Natural gas futures added 19.1 cents to $7.376 per 1,000 cubic feet. The Energy Department reported that natural gas inventories fell by 88 billion cubic feet last week, more than expected.
In London, January Brent crude futures rose 40 cents to $88.89 a barrel on the ICE Futures exchange.