Oil prices hit their highest levels in more than seven years Tuesday, driven in part by hopes of a global economic recovery that would ramp up demand.

Stock markets however headed south, with US Treasury yields surging on expectations the Federal Reserve will have to unveil several interest rate hikes to tackle a worrying spike in inflation, leading the Dow to finish 1.5 percent lower on its first day back after a long holiday weekend.

European crude benchmark Brent North Sea reached $88.13 per barrel, while the US West Texas Intermediate contract hit $85.74 -- the highest levels since October 2014 -- before easing slightly in later trading. 

Expectations of Fed tightening continued to support the dollar.

A drone attack on Monday in Abu Dhabi claimed by Yemen's Huthi rebels, which triggered a fuel tank blast that killed three people, also supported prices.

The group warned civilians and foreign firms in the United Arab Emirates to avoid "vital installations," raising concerns about supplies from the crude-rich region.

"The suspected drone attack in Abu Dhabi underscores the ongoing threat against civilian and energy infrastructure in the region amid heightened regional tensions," said Torbjorn Soltvedt at risk intelligence company Verisk Maplecroft.

"Reports of damage to fuel trucks and storage will concern oil market watchers, who are also keeping a close eye on the trajectory of ongoing nuclear talks between the US and Iran," he added.

OANDA analyst Craig Erlam said OPEC nations and other key producers were struggling to meet targets to lift output by 400,000 barrels a month, which added to the upward pressure.

"The evidence suggests it's not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages," he noted.

"That should continue to be supportive for oil and increase talk of triple-figure prices."

Hopes for more monetary easing by major consumer China to reinforce its stuttering economy were also seen as a key support for the oil market.

- Eye on earnings -

Following an almost uninterrupted rally since the early days of the pandemic, stock markets are showing signs of levelling out as global finance chiefs shift from economy-boosting largesse to measures aimed at reining in inflation.

Those fears drove global bond yields up on Tuesday, with German bund yields coming close to touching zero percent, their highest level since 2019. 

"The move higher also raises the prospect that the European Central Bank won't be able to hold its line of no rate rises this year," said CMC Markets analyst Michael Hewson.

Still, equities are expected to enjoy further gains in 2022 as countries reopen and people grow more confident about travel, assuming concerns ease over the Omicron coronavirus variant.

Analysts are also watching the corporate earnings season that is underway, with hopes that firms can match their stellar performances from last year.

Shares in video game publisher Activision Blizzard, maker of blockbuster titles including "Call of Duty", closed 25.9 percent higher after Microsoft announced a $69 billion buyout.

Shares in Microsoft slid 2.4 percent by the end of trading.

"This is a big step up with Microsoft getting in on the ground floor when it comes to creating as well as overseeing content on its own gaming platform," said Hewson.

Microsoft's Xbox console makes it a major player in the gaming industry, even if it trails far behind Sony's PlayStation.

- Key figures around 2150 GMT -

Brent North Sea crude: UP 1.2 percent at $87.51 per barrel

West Texas Intermediate: UP 1.9 percent at $85.43 per barrel

New York - DOW: DOWN 1.5 percent at 35,368.47 (close)

New York - S&P 500: DOWN 1.8 percent at 4,577.11 (close)

New York - Nasdaq: DOWN 2.6 percent at 14,506.90 (close)

London - FTSE 100: DOWN 0.6 percent at 7,563.55 (close)

Frankfurt - DAX: DOWN 1.0 percent at 15,772.56 (close)

Paris - CAC 40: DOWN 0.9 percent at 7,133.83 (close)

EURO STOXX 50: DOWN 1.0 percent at 4,257.82 (close)

Tokyo - Nikkei 225: DOWN 0.3 percent at 28,257.25 (close)

Hong Kong - Hang Seng Index: DOWN 0.4 percent at 24,112.78 (close)

Shanghai - Composite: UP 0.8 percent at 3,569.91 (close)

Euro/dollar: DOWN at $1.1325 from $1.1407 late Monday

Pound/dollar: DOWN at $1.3598 from $1.3652

Euro/pound: DOWN at 83.28 pence from 83.55 pence

Dollar/yen: UP at 114.60 yen from 114.58 yen

ExxonMobil targets 'net zero' emissions

ExxonMobil pledged Tuesday to reach "net zero" greenhouse gas emissions in its operations by 2050, but stopped short of extending the promise to products it sells throughout the global economy.

The petroleum giant's promise covers "Scope 1" and "Scope 2" emissions, which account for carbon emissions from ExxonMobil operations, as well as emissions associated with the purchase of heating or cooling at its facilities, according to a company press release.

But the US oil giant, which has long been criticized by environmentalists over its climate record, avoided targets on "Scope 3" emissions, which are those from products sold, such as the gasoline consumers buy. 

Some European companies such as Total have pledged to cut those emissions as well.

Environmental activists have argued that oil needs to be phased out if the world is to avoid catastrophic climate change, and immediate plans are necessary to reduce "Scope 3" emissions.

The move comes on the heels of ExxonMobil's earlier announcements that boost spending on lower-emissions technologies, including through major carbon capture and storage projects.

The company also cited programs to reduce routine flaring of gases and employ more renewable energy and lower-emission power sources throughout company operations.

ExxonMobil will release "detailed roadmaps" addressing 90 percent of operations-related greenhouse gas emission by the end of 2022, with the remainder in 2023, according to a press release.

Chief Executive Darren Woods cited the company's work in the Permian Basin, a major oil-producing region in the United States, as a spot where superior technology has enabled it to grow production while mitigating the risk of climate change.

"If you look over the next several years, our production coming out of the Permian is growing, and yet at the same time, we're lowering emissions and we've made a commitment to have a Permian operations at net-zero carbon by 2030," Woods told CNBC. 

"And so those two can go hand in hand if you're thoughtful about how best to achieve that."

Mark Brownstein, senior vice president at Environmental Defense Fund, said ExxonMobil's announcement was evidence of progress at the oil giant after shareholders in 2021 elected three board members favored by environmentalists over the company's opposition.

"Measures addressing Scope One and Scope Two emissions are certainly necessary. But they're not sufficient," said Brownstein. "When talking about oil and gas, the vast majority of emissions are associated with the products that these companies sell."

More critical was Sierra Club Senior Director of Energy Campaigns Kelly Sheehan, who said oil and gas expansion efforts must be curtailed "immediately."

"Without a commitment to limit the activities that are driving the climate crisis, Exxon's climate plan is just another bid to appease its shareholders and the public without changing its dangerous business practices," Sheehan said.