Global oil prices fell on Monday but tensions in the crude-producing Middle East -- where jihadists declared an Islamic state straddling Iraq and Syria -- will likely keep prices high, analysts said.
Brent crude for delivery in August hit to a two-week low at $112.51 per barrel in early morning London deals. It later stood at $112.65, down 65 cents from Friday's close.
US benchmark West Texas Intermediate for August dipped 42 cents to $105.32 a barrel.
"There were still worries about the situation in Iraq although oil prices have fallen slightly," said analyst Daniel Sugarman at trading firm ETX Capital.
"Violence in Iraq so far has largely been in the north of the country, while Iraq’s main oil wealth is in the south."
Ruthless jihadists spearheading a Sunni militant offensive in Iraq have declared an "Islamic caliphate" and ordered Muslims worldwide to pledge allegiance to their chief, in a spectacular bid to extend their authority.
The Islamic State of Iraq and the Levant renamed itself simply the Islamic State (IS) and declared its frontman the leader of the world's Muslims, in a clear challenge to Al-Qaeda for control of the global jihadist movement.
- Jihadists declare 'Islamic state' -
The jihadists said their caliphate would spread from Aleppo in northern Syria to Diyala in eastern Iraq.
Iraqi forces meanwhile pressed a counter-offensive Monday against executed dictator Saddam Hussein's hometown of Tikrit, one of a string of towns and cities overrun by IS-led fighters in a swift advance that left more than 1,000 people dead, displaced hundreds of thousands and piled pressure on Prime Minister Nuri al-Maliki.
Oil prices had soared to nine-month peaks in mid-June on fears that violence in Iraq would slash output from OPEC's second-biggest oil exporter. However, they have since fallen as supply fears faded.
French bank BNP Paribas has meanwhile raised its average oil price forecasts for 2014 and 2015 by 4-6 percent because of the developments in the Middle East.
"Geopolitics in the Middle East has recently introduced concerns about supply disruptions and, consequently, led to a sharp increase in global crude oil prices," it said.
While actual supply shortages have not happened yet, "the possibility of uncertainties persisting and pushing up the price higher cannot be ignored", it warned.
The crisis has rocked the global oil market because Iraq is the second-biggest producer within the 12-nation Organization of Petroleum Exporting Countries (OPEC).
Iraq has more than 11 percent of the world's proven resources and produces 3.4 million barrels a day.
- Uncertain US demand outlook -
Elsewhere, oil market traders also remain concerned about the demand outlook for the United States.
Data showed last week that consumer spending in the United States rose by just 0.2 percent in May after flattening in April.
US jobless claims, another barometer for the giant American economy, totalled 312,000 in the week ending June 21, down just 2,000 from the week before.
As the world's top oil consuming nation, the health of the US economy is a key influence on oil prices.