Oil prices climbed about three per cent on Thursday amid escalating tensions in Middle East as U.S. alleged that its military drone was shot down by an Iranian missile.

The drone was downed in international airspace over the Strait of Hormuz by an Iranian surface-to-air missile, a U.S. official, speaking on condition of anonymity, said on Thursday.

Earlier, reports out of Iran said that the nation’s Revolutionary Guards had downed a U.S. “spy” drone in the southern province of Hormozgan.

Tensions have been rising in the Middle East after last week’s attacks on two tankers near the Strait of Hormuz, a chokepoint for oil supplies.

Fears of a confrontation between Iran and the United States have mounted, with Washington blaming Tehran for the tanker attacks and Tehran denying any role.

Oil prices rose earlier, supported by signs of improving demand in the United States and an agreement between Organization of the Petroleum Exporting Countries (OPEC) and other producers on a date for a meeting to discuss output cuts.

Signs that the U.S. and China were resuming talks to resolve a trade war that is threatening global growth also supported the price rise.

“The geopolitical side is the wild card and can’t be predicted, not just the Iran concerns but also the trade meeting between President Donald Trump and Chinese President, Xi Jinping,’’ Phin Zeibell, senior economist at National Australia Bank, said.

Brent crude futures were up 1.93 dollars or 3.1 per cent, at 63.75 dollars a barrel around 0650 GMT, after rising as high as 63.88 dollars.

U.S. West Texas Intermediate (WTI) crude futures were up 1.73 dollars or 3.2 per cent, at 55.49 dollars a barrel.

After swelling to near two-year highs, U.S. crude stocks fell by 3.1 million barrels last week, compared with analyst expectations for a draw of 1.1 million barrels, the Energy Information Administration (EIA) had said on Wednesday.

Refined products also posted surprise draw-downs as gasoline demand ticked higher on a weekly basis and surged 6.5 per cent from a year earlier.

Members of OPEC agreed to meet on July 1, and to be followed by a meeting with non-OPEC allies on July 2, after weeks of wrangling over dates.

OPEC and its allies will discuss whether to extend a deal on cutting 1.2 million barrels per day of production that runs out this month.

Momentum for an agreement appeared to be building as the United Arab Emirates’ energy minister told Al-Bayan newspaper that an extension is “logical and reasonable”.

Expectations that U.S. Federal Reserve may cut interest rates at its next meeting are also supporting oil prices.

“Fresh stimulus from the largest economies will greatly improve the demand-side argument. A positive outcome with the U.S.-China will be icing on the cake,” said Edward Moya, senior market analyst at brokers OANDA.

(Reuters/NAN)