Oil prices climbed more than $2 on Wednesday, rebounding from 7-week lows, as the killing of a Hamas leader in Iran ratcheted up tensions in the Middle East and overshadowed concerns about weak China demand.

Brent crude futures were up $2.18, or 2.77 percent, to $80.81 a barrel by 1201 GMT ahead of expiry on Wednesday, while the more active October contract was up $2.40 at $80.47.
US West Texas Intermediate crude futures were up $2.64, or 3.53 percent, to $77.37 a barrel.

A 0.4 percent fall in the US dollar index also lent support to prices. A weaker dollar can boost demand for oil by making greenback-denominated commodities like oil cheaper for holders of other currencies.

A day earlier Brent and WTI both fell about 1.4%, closing at their lowest levels in seven weeks.
Tension in the Middle East heated up on news that Hamas leader Ismail Haniyeh was assassinated in Iran.

This came a day after the Israeli government claimed it killed Hezbollah's most senior commander in an airstrike on Beirut in retaliation for Saturday's rocket attack on Israel.

Separately, the United States also conducted a strike in Iraq in the latest conflict in the region.

"Overnight developments and elevated geopolitical risk merely provide temporary reprieve for oil benchmarks. Unless oil and gas infrastructure is hit, the latest spike is unlikely to last," said Gaurav Sharma, an independent oil analyst in London.

BP shares surged as much as 9 percent at the start of trade Tuesday, before settling back with gains of around 2 percent.

The conflict in the Middle East has not affected supplies from the region.

Ample spare production capacity held by OPEC members has also limited the impact of conflict in the Middle East, analysts have said.

Still, Brent and WTI are on track in July to post their biggest monthly loss since October 2023 on lingering concerns about China's demand outlook and expectations OPEC+ will stick to their current deal on production and start unwinding some output cuts from October.

Top ministers from OPEC+, will hold an online joint ministerial monitoring committee meeting (JMMC) on Thursday.

Slowing fuel demand in China, the world's largest crude oil importer, is also weighing on oil markets.

China's manufacturing activity in July shrank for a third month, an official factory survey showed on Wednesday.

"Concerns about Chinese demand remain elevated as today's PMIs declined, with the manufacturing sector further contracting. This suggests that any additional gains due to intensifying tensions in the Middle East may remain limited and short lived," said Charalampos Pissouros, senior investment analyst at brokerage XM.