It's unclear whether the talks will proceed after the Islamic republic's demands: File Image/Pixabay

The perhaps inevitable flare-up in tensions between the U.S. and Iran culminating in a botched assault on a U.S.-flagged vessel in the Strait of Hormuz led to a near-2 percent rise in oil prices on Tuesday.

After an Iranian drone buzzing a U.S. aircraft carrier was shot down in the Arabian Sea and following Iranian gunboats approaching a tanker north of Oman, Brent settled up $1.03, or 1.6 percent, at $67.33 per barrel.

West Texas Intermediate settled up $1.07, or 1.7 percent, at $63.21.

Limiting oil's upside was the U.S. dollar index hovering near a high of more than a week (a stronger dollar hurts demand for dollar-denominated crude from foreign buyers).

Bob Yawger, director of energy futures at Mizuho, said in a note, "The diplomatic effort to avoid a U.S. military strike in Iran is unravelling ... it would appear [elements in Iran] are trying their best to sabotage the process right now."

Iran also reportedly demanded that scheduled talks this week with Washington be held in Oman instead of Turkey, and that they be narrowed to nuclear issues only; another sign that the Islamic republic is deliberately trying to provoke mercurial U.S. president Donald Trump.

A flare-up in tensions on Tuesday also occurred between Russia and Ukraine, with the latter's president Volodymyr Zelenskiy accusing Russia of exploiting a US-backed energy truce to stockpile munitions and using them to attack Ukraine prior to this week's scheduled peace talks.

However, this was presumably good news for analysts worrying about a perceived global oil glut in 2026, as any meaningful progress in peace negotiations would also raise the prospect of sanctions being lifted against Russia's oil exports.

Also on Tuesday, the American Petroleum Institute estimated that U.S. crude inventories fell by 11.1 million barrels last week, and if official data on Wednesday confirms this amount, it would be the biggest drawdown since June.

Meanwhile, people familiar with the matter told media that the U.S. Treasury could issue a general license as soon as this week to allow companies to pump crude in Venezuela for the first time in years; but while this signals a reopening of a grossly mismanaged industry, analysts warned that it could take more than $180 billion and well over a decade to restore output anywhere near historic levels.