Brent crude slipped on Wednesday as some investors took advantage of a six-day rally to lock in profits and the market saw Iran's threat to halt oil shipments via the Strait of Hormuz as no more than rhetoric.
Brent was down $1.01 to $108.26 a barrel by 1451 GMT. Prices hadsurged over 5 percent since December 16, including a gain of more than a dollar on Tuesday.
U.S. crude was down by 87 cents at $100.47 by the same time. Trading volumes were thin for both contracts.
Iran's first vice-president warned on Tuesday the flow of oil through the Strait of Hormuz would be stopped if foreign sanctions were imposed on Iran's crude exports over its nuclear ambitions.
Closing off the Gulf to oil tankers will be "easier than drinking a glass of water" for Iran if the Islamic state deems it necessary, Iran's top naval commander told the country's state television on Wednesday.
These remarks coincided with a 10-day Iranian naval exercise in the strait and nearby waters, a show of military force that began on Saturday.
The U.S. State Department said it saw "an element of bluster" in the threat. The United States and its allies maintain a large fleet of warships in the region.
"The threat by Iran to close the Strait of Hormuz supported the oil market yesterday, but the effect is fading today as it will probably be empty threats as they cannot stop the flow for a longer period due to the amount of U.S. hardware in the area," said Thorbjoern bak Jensen, an oil analyst with Global Risk Management.
France urged Iran to adhere to international law allowing freedom of navigation in the strait.
Any fall in oil prices may be limited for the long term, however, by the tension over Iran.
"The issues are not going to be resolved quickly as to how supplies are going to be managed if we impose sanctions on Iran," Greg Smith, executive director of Global Commodities Ltd., said.
"I'm a long-term bull, and what we are seeing is justification as to why you want to be in for the long term."
Most of the crude exported from Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq - together with nearly all the liquefied natural gas from lead exporter Qatar - must slip through the Strait of Hormuz, a 4-mile wide shipping channel between Oman and Iran.
About a third of all seaborne oil was shipped through the Strait in 2009, according to the U.S. Energy Information Administration.
Top oil exporter Saudi Arabia and other Gulf OPEC states stood ready to replace Iranian oil if further sanctions halted Iranian crude exports, industry sources said.
U.S. STOCKS DATA MAY SUPPORT PRICES
Oil prices could find further support from the release of weekly U.S. crude stocks data on Wednesday and Thursday.
Domestic crude oil inventories are expected to have fallen for a seventh straight week as refiners delayed imports to draw down stockpiles for year-end tax considerations, a Reuters poll ahead of weekly supply data. <EIA/S>
The American Petroleum Institute (API) will publish its weekly report at 2130 GMT on Wednesday, while data from the U.S. Energy Information Administration (EIA) will be released on Thursday.
Crude trading volumes remained reduced in the holiday week, with Brent volume on Tuesday 76 percent below the 30-day average.
In Europe, where the economy has been struggling, crude oil supply to the region's largest independent refiner Petroplus may dry up as its lenders had frozen about $1 billion in borrowing allowance, on which the company relied to run its day-to-day business.
The fall in ICE gasoil prices were limited to about 0.05 percent due to concerns over fuel supply.