Oil slipped on Monday in volatile trading as investors weighed the effect on crude futures and other markets from news that U.S. forces killed al Qaeda leader Osama bin Laden.

Brokers and analysts said oil's early tumble and the U.S. dollar's initial bounce after news of bin Laden's death did not alter the factors that have pushed the greenback to three-year lows against a basket of currencies and did not end turmoil in Africa and the Middle East that has supported oil prices.

It will increase the volatility because of unknowns, the prospect of retaliation, and uncertainty, said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.

After the early decline, oil bounced up on lift from an Iran state television report that Israeli military aircraft were massing at a U.S. base in Iraq. The Pentagon dismissed the report as ridiculous and Israel said it had no knowledge of such a plan.

Brent crude for June fell 66 cents to $125.23 a barrel at 1:46 p.m. (1746 GMT), reaching $126.54 after an early slide to $121.67. Brent's 2011 peak of $127.02 was reached on April 11.

U.S. crude for June fell 33 cents to $113.60, having reached $114.83, the highest intraday price since hitting $130 on September 22, 2008, after bouncing from an earlier $110.82 low.

We're back to testing ranges like we were last week and Brent's failure to get to $127 on the bounce is probably why we pulled back again, said Chris Dillman, analyst at Tradition Energy in Stamford, Connecticut.

The CME Group's volatility index for oil <.OVX> rose 1.33, or 4.3 percent, to 31.72. It fell as low as 29.36 on April 21.

Brent crude trading volumes were dampened by a holiday in the United Kingdom, while U.S. crude was on pace to be more than half million lots with 3-1/2 hours of Globex trading remaining on Monday, according to Reuters data.

Both Brent and U.S. crude oil prices initially suffered multi-dollar retreats and the dollar was bolstered by the U.S. military success.

Bin Laden was killed in a U.S. helicopter raid on a mansion near the Pakistani capital Islamabad, officials said, ending a nearly 10-year worldwide hunt.

Fears that bin Laden's death might trigger a violent response by al Qaeda or other supporters were reinforced when the Pakistani Taliban threatened attacks against government leaders, including President Asif Ali Zardari, the Pakistan army and the United States.

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.

Despite the initial market impact on oil prices, there's really no significant impact here on oil production or transit, said Ian Bremmer, the president and founder of Eurasia Group.

Al Qaeda's prominence in Yemen and Saudi Arabia never meaningfully threatened Saudi oil production; so no change with Bin Laden's death.


The dollar initially rose broadly and after the news of bin Laden's death, but later the euro rallied to a 17-month high against the greenback on expectations U.S. interest rates will stay low even as euro zone rates look set to rise further.

The dollar index <.DXY> gave up its gains and fell to a three-year low, unable to reverse a dollar-selling trend that has pressured the currency in recent weeks.

Crude had a bounce after a dubious knee-jerk reaction to the death of bin Laden, said Stephen Schork, president at the Schork Group in Villanova, Pennsylvania.

The dollar remains weak and doesn't look to strengthen much any time soon and the risks to supply in Africa, the Middle East and Iran are still there.

(Additional reporting by Matthew Robinson and Gene Ramos in New York, Christopher Johnson in London and Alejandro Barbajosa in Singapore; Editing by Alden Bentley and David Gregorio)