Traders said commodity and equities markets got a boost ahead of China's first quarter growth data, due out on Friday, on expectations the world's No. 2 oil consumer would be stronger than expected.
Further support came after an Italian bond auction showed good demand, spurring investors out of the dollar to seek higher returns from riskier asset classes. The euro zone debt crisis has spurred worries about global fuel consumption.
Oil traders were also awaiting the resumption of talks between Iran and world powers over Tehran's disputed nuclear program on Saturday. If the talks succeed, it could reduce the risk premium that has lifted oil prices by 15 percent this year on worries about supply from Iran.
ICE Brent crude for May delivery, which is expiring on Friday, settled up $1.53 at $121.71 a barrel, after dropping to an early low of $119.28.
US May crude settled up 94 cents at $103.64, briefly topping the 50-day moving average during intraday activity before profit taking eroded gains late in the session.
"Today's gains in crude stem from the strong gains in equities and the weakening of the dollar that raised investor appetite for oil and other commodities," said Chris Dillaman, analyst at Tradition Energy in Stamford, Connecticut.
First-time filings for unemployment insurance in the US unexpectedly rose last week, hitting their highest since January and adding to overall concerns about the health of the giant US economy.
But the latest data also increased expectations that the US Federal Reserve will take action to support the economy.
On Thursday, New York Federal Bank president William Dudley, an influential voting member of the US central bank's monetary policy committee, said that if the economic outlook does worsen, US policymakers are ready to deploy a third round of asset purchases.
Such purchases have supported commodity prices in recent years, pushing investors seeking better returns into the asset class.
Brent total volume jumped 22 percent against its 30-day average while US crude dealings were up 8 percent against its 30-day average, according to Reuters data.
US gasoline and heating oil futures ended the day nearly 2 percent higher, extending gains following Wednesday's government data showing stronger-than-expected stockpile draw downs for last week.
Oil futures had dipped in early trade after the International Energy Agency, adviser to 28 industrialized nations on energy policies, said in a monthly report that the oil market has broken a two-year cycle of tightening supply conditions as demand growth weakens and top export Saudi Arabia increases output.
Oil markets have been balancing demand concerns against a string of supply losses across the globe and a potential drop in Iranian export as US and EU sanctions — aimed at deterring Tehran's nuclear ambitions — come into effect over the summer.
The Organization of Petroleum Exporting Countries (OPEC) said in a monthly report that oil markets are well supplied and the only reason prices are high is the perceived danger of a supply shortage.
