DVN Devon Energy Corp

By David Hodari and Ryan Dezember 

Oil prices climbed sharply Thursday as tensions mounted in the Middle East and the dollar fell, extending a period of high volatility for crude.

West Texas Intermediate futures rose 5.4% to $56.65 a barrel on the New York Mercantile Exchange, the biggest daily gain since December. Brent crude, the global benchmark, was up 4.3% at $64.45 a barrel on London's ICE Futures exchange.

Shares of U.S. oil producers, rig operators, pipelines owners and refiners also rallied, leading the S&P 500 higher to close at a record. Energy shares in the stock index were up 2.2%, while those in the S&P 600 index of smaller companies climbed 4.4%.

Energy stocks have been among the poorest performers of 2019, but turmoil in the Middle East has recently lured back investors, who are betting that domestic producers will grab global market share from the Organization for Petroleum Exporting Countries. Among the big gainers Thursday were producers Noble Energy Inc. and Devon Energy Corp., up 6.1% and 4.3%, respectively, and refiner HollyFrontier Corp., which added 5.4%. Oilfield services firm Halliburton Co. gained 4.9%.

Iran's Revolutionary Guard said early Thursday it had shot down a U.S. 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 hostilities ratcheting up over recent weeks. Saudi Arabia and the U.S. are on one side. Iran and Houthi Yemenis are 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 has 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. "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 shocks boosts in a period of anxiety over the health of global economic growth.

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

EIA data released Wednesday showed a larger-than-expected weekly decline in U.S. crude inventories as well as record gasoline demand, and a generally weaker economic backdrop has prompted policy reaction this week from central banks. The European Central Bank signaled possible stimulus measures Wednesday, while Federal Reserve Chairman Jerome Powell signaled increasing willingness Thursday 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, an 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 Mr. Varga.

Separately, OPEC altered the dates of its coming meeting Wednesday. With the bloc and its allies having finally agreed to meet July 1-2, 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.

Meanwhile, U.S. natural gas prices plumbed new three-year lows, with futures falling 4% to $2.185 per million British thermal units, after the EIA reported greater injections into storage than expected by analysts. Unseasonably mild weather has limited demand for electricity to power air conditioners while the recent rise in crude prices portends more gas produced as a byproduct of oil drilling.

--Ryan Dezember contributed to this article.

Write to David Hodari at David.Hodari@dowjones.com and Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

June 20, 2019 16:49 ET (20:49 GMT)

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