Oil plunged more than a dollar to less than $61 a barrel yesterday as mild weather in the US hit demand for winter fuel.
The slide wiped out early gains that were driven by worries that Iran might disrupt oil flows in response to UN sanctions.
US crude fell $1.56 to $60.85 a barrel by 16.49 GMT, while Brent crude dropped by $1.54 to $60.88 a barrel.
After briefly touching a three-month high last Wednesday, prices fell more than a dollar last week as mild weather in top heating consumer the US northeast began to trigger selling.
"The weather still dominates the demand picture," said Steve Bellino, senior vice-president for energy risk management at Fimat USA.
DTN Meteorlogix said temperatures in the US northeast had averaged five to eight degrees Celsius above normal over the Christmas holiday weekend.
As the mild weather continued, the national weather service said US heating oil demand was expected to be about 23 per cent below normal this week.
The fall reversed a trend earlier in the day that saw prices rise on the back of fears of the impact of UN sanctions against Iran and a move to cut production by the Organisation of Petroleum Exporting Countries (Opec).
The price approached $63 a barrel after Iran warned it could use its oil exports as a weapon following the UN Security Council decision to impose sanctions on its trade in nuclear goods.
News that Abu Dhabi was set to be the first to implement a new round of Opec supply cuts added to the gains. US crude had climbed 54 cents to $62.95 a barrel by 12.21 GMT and Brent crude had jumped 66 cents to $63.08. Public holidays across Europe meant trading volumes were very thin.
After months of deadlock, the security council agreed on Saturday to impose sanctions on Iran's trade in nuclear materials and technology, drawing a warning from Tehran.
"If necessary, Iran will use any weapon to defend itself," oil minister Kazem Vaziri-Hamaneh was quoted as saying by the semi-official Fars news agency on yesterday. In the past he has said Iran would prefer not to play the oil card.
Iran, the world's fourth-largest crude producer, has condemned the resolution as illegal and on Sunday vowed to speed up enrichment work, which could heighten tensions.
Oil prices rose earlier in the year in response to fears Iran might cut its oil exports or disrupt Gulf shipping as its row with the West over its nuclear programme escalated.
The issue had faded since summer as the UN appeared unable to agree on how to deal with Tehran.
Some analysts said traders might disregard the latest developments unless they saw evidence of supply disruption.
"It is certainly a factor, but I think geopolitical matters will be ignored unless clearer risks materialise," said Makoto Takeda, energy analyst at Bansei Securities. - ( Reuters)
