Oil rises as worries over US budget deal ease

The price of oil rose to near $88 a barrel on Thursday as U.S. leaders voiced optimism that a budget deal would be reached before the end of the year.

By early afternoon in Europe, benchmark crude for January delivery was up $1.38 to $87.87 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped 69 cents to finish at $86.49 per barrel in New York.

Oil has traded in a narrow range this month as cautious investors await the outcome of budget talks in Washington. Without an agreement, huge tax hikes and spending cuts will automatically take effect Jan. 1 — the deadline dubbed the "fiscal cliff."

Economists say that could push the U.S. back into a recession, and it would mean less demand for oil and other energy products. But Republican House Speaker John Boehner and President Barack Obama both issued statements Wednesday indicating that negotiations were progressing.

In Europe, meanwhile, sentiment improved this week after Greece's bailout creditors agreed to pay its next installment of loans and outlined a series of measures to lower its debt load over the coming decade.

Oil prices were also helped by statistics showing a fall of 300, 000 barrels in U.S. crude supplies, as reflected in the weekly report of the Energy Department's Energy Information Administration. Analysts had been expecting a build of over 2 million barrels. At 374.1 million barrels, supplies are still high, up 11.8 percent on the year.

Brent crude, which is used to price many international varieties of oil, was up $1.26 to $110.77 per barrel on London's ICE Futures exchange.

In other January energy futures trading on the New York Mercantile Exchange:

— Heating oil rose 2.84 cents to $3.0493 per gallon.

— Wholesale gasoline added 2.35 cents to $2.7112 per gallon.

— Natural gas fell 4.7 cents to $3.754 per 1,000 cubic feet.

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Pamela Sampson in Bangkok contributed to this report.