Brent crude held above $114 a barrel on Monday as traders weighed the prospect of a supply disruption from Iran against the risk that a sovereign debt default by Greece could tip the euro zone into a demand-sapping recession.
Market participants are watching to see if Greek coalition parties accept the painful terms of a new bailout deal to avoid a messy default. A decision is due later on Monday.
In Iran, leaders continued to threaten military action in its increasingly volatile stand-off with world powers over its nuclear ambitions, putting a floor under oil prices.
Front-month Brent crude slipped 6 cents to $114.52 a barrel by 0504 GMT, after falling as much as 41 cents earlier. Brent rose 2.8 percent last week to settle near a three-month peak on Friday, after a positive U.S. jobs report fueled hopes of stronger demand in the top oil-consuming nation.
U.S. crude was down 55 cents at $97.29 a barrel, after posting a loss of 1.73 percent last week.
"There's still not much confidence over the euro zone economies, and that is limiting upside from strong U.S. data and the tensions in Iran," said Ken Hasegawa, a commodity derivatives manager with Newedge Brokerage in Tokyo.
The U.S. dollar strengthened against a basket of currencies after the euro softened ahead of the Greek deadline, making dollar-denominated commodities like oil more expensive when purchased in other currencies.
"One of the key risks in the European situation is the possibility that Greece will not achieve agreement to the austerity measures being required of them," said Ric Spooner, chief market analyst with CMC Markets in Sydney.
IRAN SUPPORTS
Oil prices remain supported by growing tensions in the oil-producing region of the Middle East, after Iran's deputy Revolutionary Guards commander said on Sunday Tehran will target any country used as a launchpad for attacks against its soil.
This latest warning comes days after the country's supreme clerical leader threatened reprisals for the West's new ban on Iranian oil exports.
But comments by U.S. President Barack Obama over the weekend that Israel has not decided yet whether to attack Iran, coming after his defence secretary said an Israeli strike was likely within month, might help to cool tensions.
BRENT/WTI
U.S. crude could weaken further relative to Brent after the spread between the two benchmarks tested above its 200-day moving average just above $17.
The spread was at $17.24 a barrel by 0519 GMT, widening 50 cents from last Friday's settlement.
"Traders will be looking to push the spread wider after it breached the technical support level of $17. We could see it widening further in the near term," said Hasegawa.
Brent is expected to retrace moderately to $114.20 per barrel, before breaking a resistance zone of $115.12-$115.29 and heading towards $116.79, according to Reuters market analyst Wang Tao.
