Brent crude fell toward $113 a barrel on Thursday as renewed jitters over the euro zone crisis overshadowed fears of Iranian supply disruption after the European Union agreed to cut off oil imports from the No. 2 OPEC producer.
Oil prices are capped by worries that the festering euro zone debt crisis could slow down the global economy and affect fuel demand, despite escalating tensions between Iran and the West over its nuclear programme.
Brent crude fell 29 cents to $113.41 by 0520 GMT, after advancing nearly 6 percent in the past two sessions to close at the highest since Nov. 11 on Wednesday.
US crude was down 13 cents to $103.09 after a 4.4 percent gain in the last two sessions pushed the front-month contract to its highest settlement since May 10 on Wednesday.
"I don't think there's any light at the end of the tunnel yet," said Ryoma Furumi, a commodity sales manager at Newedge Japan, adding that the euro zone crisis could drag on for another year.
Greece is racing to complete tax and pension reforms demanded by international lenders before an inspection later in January while borrowing costs in Germany and France could rise as they risk losing their prized triple-A sovereign debt rating.
The euro fell near a one-week low against the US dollar as markets refocused on the euro zone debt crisis ahead of a French bond auction later in the day. A stronger dollar makes commodities more expensive for holders of other currencies.
Oil advanced on Wednesday on fears that Iran may take drastic measures to retaliate as the European Union reached a preliminary agreement to ban imports of Iranian crude just days after the United States signed into law tougher financial sanctions to cut Tehran's revenues.
"It's a knee-jerk reaction as more countries are leaning to comply with the sanctions," Furumi said.
US Treasury Secretary Timothy Geithner will travel to China and Japan next week to discuss US sanctions on Iran, stepping up efforts to force the Islamic Republic to drop its nuclear programme.
Despite the EU embargo threat, Iran says it is ready to ship its oil to China and other Asian countries as well as Africa.
"The excess Iranian production will continue to be fed back into Asia," said Jonathan Barratt, chief executive of Barrattsbulletin.com. Buyers could strike a deal to buy the crude at lower prices, he added.
If tensions continue to escalate, US crude futures may surge to $110 a barrel after breaking a significant resistance at $103.50, Barratt said.
Saudi Arabia had said it is prepared to increase output in case of a sudden supply cut. OPEC oil output rose in December to the highest since October 2008, a Reuters survey found.
Nigeria, another OPEC producer, faces a national strike from trade unions that could shut down large parts of the country's oil industry from next week if the government failed to restore a scrapped fuel subsidy.
Crude stocks in the United States could have fallen more than expected last week, industry data showed.
US crude stocks fell 4.4 million barrels in the week to Dec. 30, industry group American Petroleum Institute reported late on Wednesday, a sharply larger decline that the 200,000-barrel drawdown forecast in a Reuters poll.
Data from the US Energy Information Administration will be released on Thursday at 11 a.m. EST (1600 GMT).
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