Oil prices held their ground as fears that violence in big Middle East producers Iraq and Saudi Arabia might disrupt crude flows and counteract the Opec producer cartel's efforts to cool prices.
Estimates that Opec is pumping at its fastest rate in three and a half years after boosting output by 800,000 barrels per day (bpd) this month cut earlier gains, traders said.
International benchmark Brent crude was down two cents at $35.42 a barrel by 1645 GMT, ceding the day's earlier 40-cent gains. New York light, sweet crude, was down 53 cents at $38.92 a barrel, still catching up with Brent's losses on Friday when US markets were closed.
Oil prices settled into a new range last week after falling some 10 per cent from record highs in early June as Opec agreed to raise output limits and lean US fuel inventories began to recover.
Opec's 10 core members are adding 800,000 barrels per day (bpd) to world markets this month, even before new limits come into force in July, according to a preliminary report from tanker tracking consultancy Petrologistics.
The company told clients that June output appears to have jumped to 27.4 million bpd, thanks almost entirely to a 700,000 bpd increase from Saudi Arabia as the kingdom made good its pledge to pump 9.1 million bpd this month. From July 1 the cartel's ceiling rises to 25.5 million bpd.
Coupled with a slight recovery in Iraqi production, total Opec output looks to be around 29.7 million bpd in June - the highest since late 2000, according to US government data.
Despite most cartel members pumping at capacity, prices may resume climbing due to persistent tensions in oil producing countries, Opec's president said.
"I see oil prices likely to strengthen at the moment," Purnomo Yusgiantoro, also Indonesia's oil minister, told reporters on Monday. "This is because of political developments."
Middle East violence has fuelled oil's rally in recent months, as traders fear oil facilities could be a target for attacks. Prices are up 17 per cent since the start of this year.
Militant group al-Qaeda's activities in Saudi Arabia, the world's top oil supplier, escalated at the weekend with the kidnapping of an American engineer and the killing of a US national, the sixth attack on Westerners in as many weeks.
The attacks have rattled expatriates and prompted fears of a mass exodus as al Qaeda steps up its campaign to oust the kingdom's pro-US monarchy and drive out Westerners.
Two weeks ago, 22 people were killed in a shooting and hostage-taking rampage in the oil city of Khobar. But so far there has been no disruption to the kingdom's over nine million bpd output.
"Saudi Arabia is key to the oil market right now," said Tony Nunan, a manager at Mitsubishi Corp's international petroleum business in Tokyo. "It's a huge risk, all it would take is one bomb in the right place."
Prices are also being supported by the threat of rising violence in Iraq ahead of the June 30 handover of power to the Iraqis.
A suicide car bombing in the heart of Baghdad killed at least 13 people on Monday, including five foreign contractors in a civilian convoy of Iraq's US-led administration.
It was the second suicide car bombing in the Iraqi capital in 24 hours and coincided with a wave of assassinations aimed at the new interim government appointed to take over from the US-British occupation authorities on June 30.
Attacks on a pipeline running from Iraq's northern Kirkuk oilfields have stopped the flow of oil exports from the Turkish Mediterranean port of Ceyhan since May 31, leaving the country reliant on the 1.65 million bpd shipped from Gulf terminals.
Strong demand growth in the US and China has left the world oil supply system with little slack in case of disruption in a major producer, bolstering the sustained price strength.
"Strong and well-diversified global demand growth continues to put a floor under any price declines," said Washington DC-based analysts PFC Energy.
The resolution of a three-day general strike in Opec member Nigeria late last week alleviated some short-term supply anxiety, although new worries emerged from Norway, where offshore oil workers threatened a strike on Friday they said could shut in at least 240,000 bpd of production.