Brent crude oil fell below $106 a barrel on Monday, snapping a two-day rise, after Libyan rebels occupying four eastern oil ports agreed to end an eight-month blockade, raising the prospect of increased supply to world markets.
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The end to the port standoff is removing some supply worries that have helped push prices as high as $112 for the year.
Brent crude fell $1.47 to a low of $105.25 a barrel before recovering slightly to around $105.55 by 1230 GMT, down $1.17. Brent ended last week 1.2 percent lower. U.S. oil was down 80 cents at $100.34.
Under a deal thrashed out over the weekend, Libya's Zueitina and Hariga ports, held by federalist rebels demanding more autonomy from Tripoli, would open almost immediately. The larger ports of Ras Lanuf and Es Sider will be freed in two to four weeks after more talks.
"Oil prices are under selling pressure this morning as the Libyan government reached an agreement over the weekend with the rebel protesters to gradually re-open the eastern ports," said Dominick Chirichella of New York's Energy Management Institute.
"However, agreements have been reached in the past, only to fall apart prior to oil flowing. The market will approach the weekend news with caution."
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Morgan Stanley analysts were also cautious over the prospects for higher Libyan oil production, saying any rebound in output would reinforce a bearish outlook for oil this year.
"We are sceptical of any interim, let alone long-term, agreement," Morgan Stanley said in a note to clients.
"Some ports could reopen briefly, especially with budget and payroll issues, but previous announcements have disappointed. We believe market optimism will quickly fade without a sign of progress."
Further losses in oil were, however, checked by renewed tension in Ukraine, which raised concerns over the possibility of a deeper diplomatic rift between Russia and the West.
Pro-Moscow protesters occupying a government building in eastern Ukraine declared the creation of a separatist republic on Monday, in a move Kiev described as part of a plan to justify a Russian invasion to dismember the country.
"If the Ukraine tension rises again, it could lead to an escalation of sanctions, which would could be bullish for oil," said Carsten Fritsch, senior commodities analyst at Commerzbank.
Markets were also keeping an eye on Iran, which is hoping to get Western sanctions lifted, allowing it to sell more oil.
The United States dismissed suggestions that Iran was exporting much more oil than it is allowed to sell under a preliminary nuclear deal and predicted that aggregate Iranian oil sales would meet targets set for Tehran.
The remarks from a senior U.S. official came ahead of a new round of senior-level negotiations between Iran and the United States, Britain, France, Germany, China and Russia in Vienna on April 8-9.
Iranian deputy foreign minister Abbas Araqchi was quoted as saying by Press TV that Iran hoped progress would be made at talks this week to allow for the drafting of an accord to settle a dispute over its nuclear programme.