Oil prices fell more than 3 percent on Monday after U.S. forces killed al-Qaeda leader Osama bin Laden following a decade of military operations across central Asia and the Middle East.
Brent crude futures for June slumped $4.22 to a low of $121.67 a barrel before bouncing back to around $124.40 by 1225 GMT. Last month Brent hit a 32-month high above $127.
U.S. crude slid $1.25 to $112.68.
European futures trading volume was depressed by a public holiday in Britain and several other countries, which may have added to some price volatility, oil brokers said.
Bin Laden's death raised expectations that the risk of attacks by Islamic radicals could decline and tension in the Middle East could ease, bringing lower oil prices.
But analysts said most of the risk premium attached to oil prices was based on the war in Libya, wider unrest in the Middle East and North Africa, as well as increasing global oil demand.
The fall in price should be short-lived, said Carsten Fritsch, commodity analyst at Commerzbank in Frankfurt.
Talk that the risk premium should ease due to bin Laden's death is premature. The risk premium is high because of the war in Libya and ongoing unrest in the Middle East, and that is unlikely to change, he added.
Some political analysts said bin Laden's killing might trigger a violent response by al Qaeda and the Pakistani Taliban threatened attacks against government leaders, including President Asif Ali Zardari, the Pakistan army and the United States.
But oil analysts said it was unlikely the network would succeed in seriously disrupting oil supplies.
The closest al Qaeda has been to hitting the oil industry was in February 2006, when Saudi forces repelled a suicide attack on the Abqaiq oil-processing center, the world's largest.
The U.S. Department of Homeland Security and the FBI have not issued any warning of a credible or imminent threat, but Obama warned Americans to remain vigilant.
Thorbjrn 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.
The killing of Libyan leader Muammar Gaddafi's son in a NATO air strike over the weekend boosted hopes of a swifter end to the civil war and normalization of oil production sooner rather than later, analysts said.
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 slightly 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.
(Additional reporting by Alejandro Barbajosa, editing by William Hardy)