Brent futures settled up 21 cents, or 0.2 per cent, at $US112.78 a barrel. Earlier in the session, Brent had climbed more than $US4 to a high of $US116.89. US West Texas Intermediate futures finished up $US3.24, or 3.3 per cent at $US102.88, its highest since July 2022.
Conflict has spread across the Middle East since US and Israeli strikes on Iran began on February 28, stoking concerns over shipping routes around the Arabian Peninsula and the Red Sea.
Israel's military said it intercepted two drones launched from Yemen on Monday, two days after Iran-aligned Houthis fired missiles at Israel for the first time since the start of the war. The Houthis have yet to target shipping in the Red Sea, which handles about 15 per cent of global maritime traffic.
If the Houthis attack shipping and shut down the southern entrance to the Red Sea, it could drive prices up by $US5 to $US10 per barrel, according to Robert Yawger, director of energy futures at Mizuho.
Iran's effective closure of the Strait of Hormuz, a chokepoint for roughly a fifth of global oil and gas supplies, has sent oil prices up about 57 per cent this month, the steepest monthly jump in London Stock Exchange Group (LSEG) data going back to 1988, exceeding gains made during the 1990 Gulf War.
US crude, meanwhile, has climbed by 53 per cent for its biggest monthly gain since May 2020.
US Treasury Secretary Scott Bessent said on Monday the global oil market is well supplied, with more vessels travelling through the Strait of Hormuz.
US President Donald Trump warned on Monday that Iran's energy plants and oil wells would be obliterated if it does not open the Strait of Hormuz, after Iran described US peace proposals as "unrealistic" and fired waves of missiles at Israel.
Previously, Trump said he would pause attacks on Iran's energy network until April 6. Trump has said the United States and Iran have been meeting "directly and indirectly" and that Tehran's new leaders have been "very reasonable."
"Trump's extended deadline of April 6 - when the US could potentially resume attacks on Iranian energy infrastructure - has had no reassuring effect. The market is now asking for concrete signs of de-escalation, not just rhetoric," SEB Research said in a note.
In a bid to assuage investors, G7 finance leaders on Monday said they stand ready to take "all necessary measures" to safeguard energy market stability and limit broader economic spillovers from recent volatility. And in the United States, Federal Reserve Chair Jerome Powell on Monday said the US central bank can wait to see how the Iran war affects the economy and inflation, indicating that a rate hike may not be on the cards.
