NEW YORK (Reuters) - Oil slipped on Monday in volatile trading as investors weighed the effect on crude futures and other markets from news that U.S. forces killed al Qaeda leader Osama bin Laden.
While analysts said the death of bin Laden could reduce the threat against the United States by jihadists in the long term, they added it did not fundamentally alter the turmoil in the Middle East and Africa that have threatened oil supplies and supported prices this year.
“It is unlikely that the oil industry will see his death as marking a seminal shift in oil market security, and arguably there has been an incremental increase in security risks in the short term,” Lawrence Eagles of JP Morgan said in a research note.
Brent crude for June fell 77 cents to settle at $125.12 a barrel, reaching $126.54 after an early slide to $121.67. Brent’s 2011 peak of $127.02 was reached on April 11.
U.S. crude for June fell 41 cents to settle at $113.52, having reached $114.83, the highest intraday price since hitting $130 on September 22, 2008, after bouncing from an earlier $110.82 low.
U.S. gasoline futures dropped 5 cents per gallon and heating oil, the futures benchmark for distillates, slipped more than 2 cents per gallon as June contracts moved into the front-month position after May contracts went off the board on Friday.
Oil briefly bounced higher following an Iran state television report that Israeli military aircraft were massing at a U.S. base in Iraq. The Pentagon dismissed the report as “ridiculous” and Israel said it had no knowledge of such a plan.
Markets have been supported this year by disruptions in the oil supplies from Libya, as well as the loose monetary policy of the United States which have pushed investors into riskier asset classes such as commodities.
“We’re back to testing ranges like we were last week and Brent’s failure to get to $127 on the bounce is probably why we pulled back again,” said Chris Dillman, analyst at Tradition Energy in Stamford, Connecticut.
The CME Group’s (CME.O) volatility index for oil .OVX rose 1.43, or 4.7 percent, to 31.82. It fell as low as 29.36 on April 21.
Brent crude trading volumes were dampened by a holiday in Britain. U.S. trading volume rebounded from Friday’s low, 366,674-lot total, nearing half million lots traded with 1-1/4 hour of post-settlement trading remaining.
Both Brent and U.S. crude oil prices initially suffered multi-dollar retreats and the dollar was bolstered by the U.S. military success.
Bin Laden was killed in a U.S. helicopter raid on a mansion near the Pakistani capital Islamabad, officials said, ending a nearly 10-year worldwide hunt.
Fears that bin Laden’s death might trigger a violent response by al Qaeda or other supporters were reinforced when the Pakistani Taliban threatened attacks against government leaders, including President Asif Ali Zardari, the Pakistan army and the United States.
The closest al Qaeda has been to hitting the oil industry was in February 2006, when Saudi forces repelled a suicide attack on the Abqaiq oil-processing center.
“Despite the initial market impact on oil prices, there’s really no significant impact here on oil production or transit,” said Ian Bremmer, the president and founder of Eurasia Group.
“Al Qaeda’s prominence in Yemen and Saudi Arabia never meaningfully threatened Saudi oil production; so no change with Bin Laden’s death.”
The dollar initially rose broadly after the news of bin Laden’s death, but later the euro rallied to a 17-month high against the greenback on expectations U.S. interest rates will stay low even as euro zone rates look set to rise further.
The dollar index .DXY, measuring the dollar against a basket of currencies, fell back after to a three-year low after the early rally, before bouncing again.
The dollar was clinging to a small gain late on Monday, even as the euro attempted to hold on to its gain versus the greenback.
Additional reporting by Matthew Robinson and Gene Ramos in New York, Christopher Johnson in London and Alejandro Barbajosa in Singapore; Editing by Marguerita Choy