By David Hodari 

LONDON -- Oil prices sharply climbed Thursday as tensions in the Middle East continued to spiral and the dollar sold off.

Brent crude, the global benchmark, was up 2.6% at $63.45 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures rose 2.9% to $55.53 a barrel.

Iran's Revolutionary Guard said early Thursday it had shot down a U.S. RQ4 Global Hawk drone over its territory. That claim came hours after the U.S. military said a Saudi desalination plant was struck by a missile that appeared to come from Yemen.

"The market has been largely underpricing ongoing Middle Eastern tension for some time now but these growing tensions between Iran and the U.S., and Iran and the Saudis bring it back to center stage for many of us," said Warren Patterson, commodities strategist at ING.

These developments mark the latest in a series of flashpoints in the Middle East, with tensions ratcheting up over recent weeks, with Saudi Arabia and the U.S. on one side, and Iran and Houthi Yemenis on the other.

Oil prices received a sharp boost last week, after attacks on two tankers in the Gulf of Oman, which neighbors the Strait of Hormuz -- the thoroughfare for a third of the world's shipped oil. In May, prices jumped after attacks on Saudi pumping stations and its East-West pipeline.

Hostility between Saudi Arabia and Iran have come against the backdrop of U.S. sanctions aimed at driving Iranian oil exports to zero. Iran has attempted to evade those strictures, while also repeatedly threatening to shut down the Strait of Hormuz if sanctions aren't lifted.

"Each time we've had an attack in the Middle East -- we've now had a drone downed -- we've seen prices reacting positively," said Giovanni Staunovo, director at UBS Wealth Management's chief investment office. "It's related to the fact that 30% of global oil exports go through the region, but the risk premium will only stay if it risks production disruptions and so far we've seen none."

Flare-ups in the region have added to volatility in oil prices, providing shock boosts in a period of anxiety over the health of global economic growth.

The International Energy Agency, the Energy Information Administration, and Organization for Petroleum Exporting Countries have all recently said that weakening growth -- partly driven by the U.S.-China trade spat -- will stymie oil demand in the coming months.

EIA data released Wednesday showed a larger-than-expected weekly decline in U.S. crude inventories and a generally weaker economic backdrop has prompted policy reaction this week from central banks. The European Central Bank signaled stimulus measures Wednesday, while Federal Reserve Chairman Jerome Powell signaled Thursday increasing willingness to cut interest rates this year or next.

The ensuing drop in the dollar has helped buoy dollar-denominated commodities, which become less expensive for other currency holders when the dollar falls. The WSJ Dollar Index was down 0.5% on the day, extending its decline over the past month to 1.3%.

"There's also an economic part to the story, with the weakening dollar obviously bullish for oil," said Tamas Varga, analyst at PVM Oil Associates.

A cocktail of geopolitical and fundamental factors threaten to inject further volatility into oil over the coming days.

President Trump and China's President Xi Jinping are due to meet at the G-20 summit in Japan next week. After trade talks broke down several weeks ago, even the announcement of their plan prompted buying across equities and commodities markets.

"If there's a break in the trade war, stocks and oil are going to rally, " said PVM's Mr. Varga.

Separately, OPEC altered the dates of its coming meeting Wednesday. With the bloc and its allies having finally agreed to meet July 1-July 2, investor focus has returned to whether the cartel will extend its continuing production cut. United Arab Emirates Oil Minister Suhail al-Mazroui said Wednesday that a longer cut would be reasonable, according to reports.

Write to David Hodari at David.Hodari@dowjones.com

(END) Dow Jones Newswires

June 20, 2019 05:38 ET (09:38 GMT)