Oil prices extended gains on Wednesday after the US shot down an Iranian drone and armed Iranian boats approached a US-flagged vessel in the Strait of Hormuz, rekindling fears of an escalation in tensions between Washington and Tehran.
Brent crude futures were up 56 cents, or 0.8%, at $67.89 per barrel at 0400 GMT. US West Texas Intermediate crude was up 63 cents, or 1.0%, at $63.84 per barrel.
Both benchmarks rose nearly 2% on Tuesday, as investors monitored developments between the US and Iran.
"Uncertainty about how these talks will play out means the market will likely continue to price in some risk premium," said ING commodity strategists on Wednesday.
The US military on Tuesday shot down an Iranian drone that "aggressively" approached the Abraham Lincoln aircraft carrier in the Arabian Sea, the US military said, in an incident first reported by Reuters.
Separately, in the Strait of Hormuz between the Arabian Gulf and the Gulf of Oman, a group of Iranian gunboats approached a US-flagged tanker north of Oman, maritime sources and a security consultancy said on Tuesday.
Meanwhile, Tehran is demanding that its talks with the US this week be held in Oman not Türkiye, and that the scope be narrowed to two-way negotiations on nuclear issues only, casting doubt on whether the meeting will proceed as planned.
"Heightened tensions in the Middle East provided support to the oil market," said Satoru Yoshida, a commodity analyst with Rakuten Securities.
OPEC members Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq export most of their crude via the Strait of Hormuz, mainly to Asia. Iran was the third-biggest OPEC crude producer in 2025, according to US Energy Information Administration data.
Oil prices also found support from industry data showing a sharp drop in US crude stockpiles. Inventories in the top producing and consuming nation fell over 11 million barrels last week, sources said, citing American Petroleum Institute figures.
Official data from the US Energy Information Administration is due on Wednesday at 10:30 a.m. EST (1530 GMT). Analysts polled by Reuters were expecting a rise in crude inventories.
On Tuesday, oil prices were also buoyed by a trade agreement between the US and India that raised hopes of stronger global energy demand, while continued Russian attacks on Ukraine added to concerns that Moscow's oil would remain sanctioned for longer.
"India's trade agreement with the US to halt purchases of Russian crude, along with the ongoing Russia-Ukraine war, is also providing support," Yoshida said, projecting that WTI would likely continue to trade around $65 a barrel for now.
