Brent crude oil held around $125 on Monday as tension over Iran's nuclear programme supported prices, offsetting news of an increase in production from Saudi Arabia and efforts by the United States to ease supply fears.
The threat of military action against Iran, the world's fifth largest oil exporter, has unnerved energy markets and sent oil prices soaring, with Brent crude nearly 17 percent higher since the start of the year.
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Iran has agreed to a new round of talks with the international community about its nuclear programme, which it describes as peaceful, but Western sanctions against Tehran have impacted oil exports and there are fears a military strike would severely restrict supply, analysts say.
With the oil price above $125 and potentially stalling global economic growth, OPEC kingpin Saudi Arabia has boosted production and the U.S. government plans to release oil reserves into the market to ease supply fears from Iran.
"Iran as a supply risk is supporting prices and weaker demand, rising production and physical oversupply is weighing on prices, so it is keeping prices rather stable in this narrow range," said Carsten Fritsch, commodity analyst at Commerzbank.
Brent crude was trading at $125.04 a barrel by 1020 GMT, down 77 cents after settling up more than $3 in the previous session.
U.S. crude fell 36 cents to $106.70, after climbing almost $2 on Friday.
Oil prices were also supported by a brighter outlook for the U.S. economy and signs of stability in the euro zone which also helped push Asian stocks higher on Monday.
The global economy has stepped back from the brink of danger, but high debt levels in developed markets and rising oil prices are key risks, International Monetary Fund Managing Director Christine Lagarde said on Sunday.
However, barring a supply shock, the upside for oil is limited, analysts at U.S. investment bank Morgan Stanley said.
"Risks are skewed to the downside, particularly if outages resolve, SPRs (strategic petroleum reserves) are released, or geopolitical tensions recede," they said in a report.
Reuters reported last week that Britain had agreed to cooperate with the United States to release reserves in a bid to halt rising oil prices, but that volumes and exact timelines had not yet been determined.
Saudi Arabian oil exports rose 143,000 barrels per day (bpd) in January, according to government data published Sunday, as the world's leading crude seller increased supplies to the United States.
Iraq has also set up a contingency plan to expand its oil export routes to deal with any potential crisis should Iran close the Strait of Hormuz that is used for a third of the world's sea-borne oil trade, a government spokesman said.
Another OPEC producer, Oman, located strategically on the opposite side of the Strait of Hormuz, said the risk of military conflict between Tehran and the West was rising but there was still plenty of opportunity to negotiate peace.
U.S. economic data last week added to a recent spate of good news about the pace of recovery and put a floor under oil prices.
Market participants will now be looking at preliminary Chinese manufacturing data for March due later this week for an indication of energy demand in the world's No.2 oil consumer.