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Oil prices fell more than 3 percent on Monday after U.S. forces
killed al-Qaeda leader Osama bin Laden after a decade of military operations
across central Asia and the Middle East.

ICE Brent crude futures for June fell $4.22 to a low of $121.67
a barrel before recovering some ground to trade around $122.85 by 0942 GMT.
Last month Brent hit a 32-month high above $127.

U.S. crude slid $2.40 to $111.53. Early futures market volume
was depressed by a public holiday in Britain and several other countries, which
may have added to price volatility, oil brokers said.

The oil market focused on whether the news would help unwind the
risk premium attached to prices because of war in Libya and unrest in the
Middle East and North Africa.

“There’s probably a knee-jerk reaction to the extent that part
of the geopolitical risk has been supported by al-Qaeda, so there will be an
initial sell-off,” said Jeremy Friesen, commodity strategist at Societe
Generale.

Economists including David Cohen from Action Economics warned
that in the near term, Mr bin Laden’s killing might trigger a violent response
by al-Qaeda, but analysts said it was unlikely the network would succeed in
disrupting oil supplies.

The closest al-Qaeda has been to hitting the oil industry was on
February 24, 2006, when Saudi forces repelled a suicide attack on the Abqaiq
oil-processing centre, the world’s largest.

The U.S. Department of Homeland Security (DHS) and the FBI have
not issued any warning of a credible or imminent threat, but President Barak
Obama warned Americans to remain vigilant.

“Temporary”

Thorbjørn Bak Jensen of Global Risk Management suggested the
initial sell-off was unlikely to last.

“We regard the reactions as temporary as nothing fundamentally
new is really on the table. If anything it might be a good idea to secure oil
costs,” he said.

Oil was already down before the bin Laden news, after NATO air
strikes over the weekend killed one of Libyan leader Muammar Gaddafi’s sons and
industry sources said Saudi Arabia raised output in April.

Mr Gaddafi’s youngest son and three grandchildren were killed in
a NATO air strike, the Libyan government said on Sunday. Britain said that
while it was not targeting the leader, it was homing in on the regime’s
military machine.

“What’s happening in Libya is probably an event that will see
Gaddafi moved out of his position, so the risk premium which relates to Middle
East concerns will start to erode,” said Jonathan Barratt, head of Commodity
Broking Services.

Saudi Arabia’s crude oil output edged back up in April to around
8.5 million barrels per day (bpd) from roughly 8.3 million bpd in March as
demand picked up, Saudi-based industry sources said on Sunday.

The dollar strengthened by around 0.2 percent on Monday
following last week’s slide, deterring investors from piling into commodities
this week and triggering a 10 percent plunge in spot silver prices.

Money managers increased their bets on higher U.S. crude oil
prices to a combined record level in New York and London in the week to April
26, data from the CFTC showed on Friday, as U.S. prices rose to their highest
level since September 2008.

Volatility and uncertainty due to the pan-Arab protests and
Libya’s conflict have tempered oil trading. The U.S. 30-day average volume was
down by nearly 130,000 lots compared with the 250-day average at the end of
last week, Reuters data showed.