NEW YORK (Reuters) - Oil inched up on Thursday on rising tensions in the Middle East and signs of improving Washington-Beijing trade relations, but a strong U.S. dollar limited price gains.

FILE PHOTO: Pump jacks operate at sunset in Midland, Texas, U.S., February 11, 2019. REUTERS/Nick Oxford

Brent crude futures LCOc1 settled at $66.25 a barrel, gaining 25 cents. U.S. West Texas Intermediate (WTI) crude CLc1 settled at $61.18, rising 12 cents.

The dollar rose about 0.5% .DXY, recovering from a six-month low after a downbeat December left the index virtually unchanged for 2019. A stronger dollar makes oil more expensive for holders of other currencies.

Worries that rising tensions in the Middle East could hit supply outweighed strides in the dollar index.

Turkey’s parliament overwhelmingly approved a bill allowing troop deployment in Libya, paving the way for further military cooperation between Ankara and Tripoli. It is unlikely to put boots on the ground immediately.

Over the weekend, the U.S. military carried out air strikes against the Iran-backed Kataib Hezbollah militia group. Angry protesters then stormed the U.S. Embassy in Baghdad on Wednesday, although they withdrew after the United States deployed extra troops.

On Thursday, U.S. Defense Secretary Mark Esper said there were indications Iran or forces it backs may be planning additional attacks.

“I think everybody is conscious of what’s going on in the Middle East with Iraq and Libya,” said John Kilduff, a partner at Again Capital in New York.

Growing optimism that a trade truce between the world’s two largest economies will support energy demand also supported oil. U.S. President Donald Trump has said Jan. 15 would mark the signing of the U.S.-China Phase 1 trade deal.

January also marks the scheduled start of deeper output cuts by the Organization of the Petroleum Exporting Countries and its partners, including Russia.

The group agreed to cut output by a further 500,000 barrels per day (bpd) from Jan. 1, on top of their previous cut of 1.2 million bpd.

Russia reported record high 2019 oil and gas condensate production C-RU-OUT of 11.25 million bpd, beating the previous record of 11.16 million bpd set a year earlier, Energy Ministry data showed.

A fall in U.S. crude inventories last week also supported prices. U.S. crude stocks fell 7.8 million barrels in the week ended Dec. 27, compared with analysts’ expectations for a decrease of 3.2 million barrels, data from the American Petroleum Institute (API) showed on Tuesday.

Official data from the Energy Information Administration (EIA) is due on Friday having been delayed by two days by the New Year’s holiday.