Brent crude for July rose to as high as $111.45 a barrel, and traded $1.23 a barrel higher at $111.33 at 0817 GMT. U.S. crude, which hit an intraday peak of $98.92 a barrel, was up $1.10 at $98.80. Both benchmarks had ended below their 100-day moving averages in the previous session.
Goldman Sachs raised its 12-month price forecast for Brent to $130 a barrel from $107, and increased the end-2012 forecast to $140 a barrel from $120, citing global economic growth and tight OPEC spare capacity.
Goldman also recommended buying December 2012 ICE Brent crude oil futures.
Earlier in the day, sovereign debt problems in the euro zone, coupled with data pointing to a slowing Chinese economy, had pushed investors to sell riskier assets like oil and the euro in favor of gold and the dollar.
Spot gold hit an intraday high above $1,519 an ounce, its strongest since May 11, while the dollar .DXY held firm near a seven-week high against a basket of currencies.
"What we're seeing is some short covering or value buying after significant losses yesterday, but in the short term there are still risks from Europe's debt issues and softening economic data," said Ben Le Brun, market analyst with CMC markets in Sydney.
But analysts expect oil prices to head higher after the current correction, as strong demand from emerging economies draws down global inventories and puts a strain on OPEC's spare capacity"While near-term downside risk remains...we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand," said U.S. investment bank Goldman Sachs in a research note on Monday.
The influential Wall Street bank, which in April had predicted the major correction in oil prices earlier this month, said on May 7 that oil could surpass its recent highs by 2012.
Echoing this view was Morgan Stanley, who raised their 2011 Brent crude forecast to $120 a barrel, from $100 previously, and lifted its 2012 target to $130, from $105.
The loss of some 1.5 million barrels per day of Libyan production, and firm demand from emerging economies, will lead to tighter inventories in the second half of the year, the bank's analysts said in a report.
"It is very likely that OPEC will respond to tightening inventories by lifting their production; in response, we see flat prices moving higher as spare capacity continues its fall to untenable levels," the report said.
The Organization of the Petroleum Exporting Countries are scheduled to meet next on June 8 in Vienna.
An expected fall in U.S. crude stocks last week could also support prices, analysts said. A drop in imports and increased refinery use are forecast to have pushed crude oil inventories lower, according to a Reuters survey of analysts on Monday.
CHINA TO DRIVE DEMAND
Strong Chinese oil demand is expected to be the key driver of oil prices for the rest of this year, despite data pointing to a slowing economy, analysts said
A purchasing managers index on Monday showed China's factories expanding at their slowest pace in 10 months in May.
However, this news was tempered by data showing no let up in Chinese oil imports last month, which grew 9.6 percent year-on-year, its third-highest level ever.
"The softer manufacturing data is a good sign that tightening measures are starting to take effect and the government may be less inclined to tighten further," said CMC's Le Brun.
In a separate note to clients, Goldman trimmed its economic growth forecasts for China to 9.4 percent this year, from 10 percent previously, citing a recent run of surprisingly weak data, high oil prices and supply constraints.
The conflict in Libya escalated, with at least 12 heavy explosions heard in Tripoli early on Tuesday and a column of smoke was seen rising from the area of leader Muammar Gaddafi's compound, a Reuters correspondent said.
Uncertainty over pan-Arab protests and Libya's conflict pushed Brent to a 32-month peak last month, before a sharp correction in early May resulted in prices registering their largest ever weekly decline of more than $16 a barrel.
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