Brent crude slipped to a near four-month low on Thursday as investors shunned riskier assets following turmoil in Greece and the euro zone while oil supply could rise as G8 countries may tap emergency reserves ahead of sanctions on Iran in July.
Greece faces a possible exit from the euro zone as it failed to form a government to implement austerity measures in exchange for rescue funds from the common currency region. Investors feared Greece's exit could drag down other EU economies.
Brent crude for July was down 36 cents at US$109.39 by 0332 GMT, after slipping to US$109.01, the lowest intraday price since January 25. US crude gained for the first time in five sessions, rising 33 cents to US$93.14.
"The euro zone crisis can only go one way, that is, Greece leaving the EU on a temporary basis," Jonathan Barratt, chief executive of BarrattBulletin, a Sydney-based commodity research firm.
"If the contagion continues and people's optimism continues to deteriorate, that will translate to lower import orders for China and put oil demand under pressure."
The European Central Bank said it had stopped providing liquidity to some Greek banks that have not been successfully recapitalised, highlighting the weak state of the banking sector in the indebted country, despite efforts by Germany and France to keep Athens in the monetary union.
Oil is also under pressure from rising supply as US crude stockpiles climbed for the eighth week to their highest since 1990, amid higher output from OPEC.
US President Barack Obama will seek support to tap emergency oil reserves from other Group of Eight leaders at a summit this weekend before the European Union's July embargo of Iranian crude, Kyodo news agency reported on Wednesday.
"Supply is just too high at the moment and it is highly likely that the price of oil will be constantly discounted in the short term, until supplies drop to a more manageable level," Miguel Audencial, a sales trader at CMC Markets, said in a note.
The Energy Information Administration showed a 2.13m barrel increase in US crude stocks, a smaller increase than the 6.6m barrel jump reported by an industry group earlier in the week. Analysts had expected a 1.7m barrel build.
Stocks at Cushing, Oklahoma, the delivery point for West Texas Intermediate crude, rose 1m barrels to a record 45.13m.
Iran is due to resume talks with world powers next week over its disputed nuclear program. Easing tension between Iran and the West has reduced a risk premium built into oil prices earlier this year, analysts said. Front-month Brent is down nearly US$20 from its 2012 high of US$128.40 on March 1.
Iran said it was ready to resolve all nuclear issues in the next round of talks with world powers if the West starts lifting sanctions. Yet it violated a UN Security Council ban on weapons exports by shipping Iranian arms to Syria.
Senate Democratic Leader Harry Reid will ask the US Senate to approve a new package of oil and economic sanctions on Thursday aimed at further pressuring Iran to abandon its nuclear program.