The West Ham striker has scored twice for the U's since joining on an initial month-long deal in March, and he will now remain with the League Two play-off chasers until the end of the current campaign.
The terms of the arrangement between the two clubs mean Montano will be eligible to feature for the U's in the play-offs, should they secure a place in the top seven.
The forward told Oxford's official website: "It's good to have everything sorted. I have enjoyed my time here and it is a good club There is a lot of ambition here and everyone wants to get into League One and I am happy to try and play my part in that aim.
"Hopefully I can help the team achieve that with one last extra push. I have settled quite well, know the lads, know how we play and what sort of things are expected here. I feel I have my confidence back and I am enjoying my football here.
"Everyone here believes we can do it (make the play-offs). There is definitely enough ability here to do it and the football we play is really good. We pass the ball and play through teams if we can and I think we do things the right way here."