Oil slipped nearly $3 to end just above $95 per barrel on Monday, as unseasonably warm weather and worries of a looming recession in top oil consumer the United States outweighed fresh tensions between Iran and the U.S.
U.S. light, sweet crude for February delivery rallied briefly to a session high of $98.40 a barrel, but then fell $2.82 per barrel, or 2.9%, to $95.09 on the Nymex.
London Brent crude was also down.
Heating demand will be 38.5 percent below normal this week as temperatures rise well above normal in most parts of the U.S., the National Weather Service forecast. Demand for heating oil -- the favored heating fuel of the Northeast region -- is expected to average about 40 percent below normal this week.
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U.S crude had rallied briefly to a session high of $98.40 a barrel on news of the latest geopolitical tensions, this time in the Strait of Hormuz, a major oil shipping route in the Gulf.
Five Iranian boats made aggressive manoeuvers and showed hostile intent against three U.S. Navy ships at the weekend in the Strait of Hormuz, the Pentagon said on Monday.
The incident was the latest sign of tension between Washington and Tehran, at odds over a range of issues from Iran's nuclear program to U.S. allegations of Iranian support for terrorism.
"We rallied off the Iranian headline, but when floor trading opened we gave back those gains as we have temperatures warming, the dollar showing some recovery and concerns about the economy," said Eric Wittenauer, analyst at A.G. Edwards in St. Louis.
Oil has eased from a record peak of $100.09 a barrel last Thursday after a government report showed U.S. unemployment rate up 5 percent in December, its highest in more than two years.
The bleak unemployment report was the latest signal that top energy consumer the United States could fall into a recession later this year.
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"Concerns about the U.S. economy are clearly putting some pressure on oil prices. Some market players are also using this opportunity to take profits," said Gerard Burg, a resource analyst from the National Bank of Australia.
Burg said that while OPEC rumblings over the weekend had not given any clear signal on what action the group might take at its next meeting, there were growing expectations that it would increase output to rein in prices.
Saudi Oil Minister Ali al-Naimi said on Sunday that the rise in oil prices had been determined by market forces, but declined further comment on what action the Organization of Petroleum Exporting Countries (OPEC) would take at its next meeting on Feb. 1 in Vienna.
Separately, OPEC president Chakib Khelil said on Saturday he expected oil prices to keep rising during the first quarter of this year before stabilising in the following quarter.
Goldman Sachs, the most active investment bank in energy markets, also believes oil will stay strong and has kept its average 2008 price forecast unchanged at $95.
"We maintain that the combination of tighter short-term fundamentals and escalating costs will continue to provide strong support to oil prices in 2008, with the risk skewed to the upside from current levels," it said.