Light, sweet crude for June delivery was up $1.08 to $125.20 a barrel in electronic trade on the New York Mercantile Exchange by midday in Europe.
During Thursday's session, the front-month crude oil contract dropped as low as $120.75 before bouncing back to finish at $124.12 a barrel.
"It was one of those volatile days that we fully expect to see more of in the days and weeks ahead," said a research note from U.S. energy risk management firm Cameron Hanover, predicting greater volatility as May ends.
In London, July Brent crude gained $1.07 to $123.70 a barrel on the ICE Futures exchange in London.
"Unless there is a confluence of substantive bearish news, when there is a pullback of something like $5, it's unlikely to stay down because enough participants will see that as a buying opportunity," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.
Besides the expiration of options contracts, a temporary shutdown of ICE Futures trading in crude oil and other futures products due to a power outage also contributed to the previous session's volatility.
"So there was a lot of confusion yesterday, and not surprisingly, there was this wild, seesaw session," Shum said.
But oil has again consolidated near the $125 a barrel mark, Shum noted, because the commodity is still seen as a better bet than investors' other options.
"Oil as a class has performed better this year than equities and bonds, and continues to encourage investors to pile money into oil and stay in oil," Shum said.
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On Thursday, oil initially climbed in the floor session as U.S. diesel fuel prices jumped 3.6 cents at the pump to a new national average of $4.455 a gallon ($1.178 a liter). Diesel is used to fuel most truck, trains and ships, and is a large part of the reason prices of food and consumer goods are rising so fast.
There has also been some concern that extra Chinese demand for diesel to run emergency power generators after this week's deadly earthquake may further tighten the distillates market.
But as oil reached for new records above $126 a barrel, the U.S. Energy Department reported that natural gas inventories rose 93 billion cubic feet last week, more than analysts had expected, and that pulled the whole petroleum energy complex lower.
Fluctuations in the dollar have contributed as well to oil's volatility. The dollar has generally been stronger than earlier in the year, but it is waffling between 104 and 105 against the yen, while the euro seems to be range-bound between $1.54 and $1.55.
Investors have been viewing oil and other commodities as a hedge against inflation and a weaker dollar since the middle of last year, and that link has meant that oil has been tending to rise and fall inversely with the dollar.
In other Nymex trading, heating oil futures rose 2.84 cents to $3.6508 a gallon (3.8 liters) while gasoline prices added 2.72 cents to $3.193 a gallon. Natural gas futures rose 5.1 cents to $11.45 per 1,000 cubic feet.
[Associated Press; By PABLO GORONDI]
AP Business Writer Thomas Hogue in Bangkok, Thailand, contributed to this report.
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