Oil prices witnessed an upsurge on Thursday, extending gains from the previous session, as the execution of a Hamas leader in Iran heightened the prospect of a larger Middle East conflict and concerns about its impact on oil.

By 0800 GMT, global benchmark Brent crude prices had risen 78 cents, or 1%, to $81.62 a barrel, while US West Texas Intermediate crude futures had also gained 79 cents, or 1%, to $78.70 per barrel. The most active contracts on both benchmarks rose nearly 4% in the previous session.

Ismail Haniyeh, the leader of Hamas, was slain in Tehran, Iran, on Wednesday. His killing occurred less than 24 hours after the most senior military commander of Lebanon's militant group Hezbollah was assassinated in an Israeli airstrike in Beirut.

The fatalities fueled fears that Israel's 10-month-old battle in Gaza with Hamas was escalating into a larger Middle East conflict, perhaps disrupting regional energy supplies.

"Oil markets are understandably concerned that the death of Haniyeh may drive Iran more directly into conflict with Israel. In a client note, Commonwealth Bank of Australia analyst Vivek Dhar stated that this might jeopardize Iran's oil supplies and related infrastructure.

Dhar said markets will be concerned about Iran's ability to increase tensions through its control of the Strait of Hormuz.

"Blockading the vital canal jeopardizes the transportation of 15-20 percent of world oil supply. With insufficient spare pipeline capacity to overcome such a blockage, the Strait of Hormuz poses a significant disruption risk to oil markets," Dhar added.

A sequence of data releases from the United States, the world's largest oil user, as well as a weaker dollar, pushed prices higher.

Robust export demand pulled US crude oil stockpiles down 3.4 million barrels to 433 million barrels in the week ending July 26, according to US Energy Information Administration (EIA) data released Wednesday.

Meanwhile, the US dollar index extended its losses from the previous session on Thursday, when the Federal Reserve kept interest rates unchanged but left the door open for a cut in September. A weakened dollar may stimulate oil demand among investors holding foreign currencies.  Longer term, however, investors are skeptical of Chinese demand, according to Phillip Nova analyst Priyanka Sachdeva, who adds that this uncertainty will continue to limit oil price gains.

Official data from China released on Wednesday revealed that industrial activity fell to a five-month low in July, as manufacturers struggled with decreasing new orders and low pricing. According to a private sector survey released on Thursday, China's manufacturing activity contracted in July for the first time in nine months, as new orders fell.