Oil prices hovered near $85 a barrel Thursday as investors waited to see if political upheaval in the Middle East could spread and disrupt crude supplies.
By early afternoon in Europe, benchmark crude for March delivery was down 26 cents at $84.73 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 67 cents to settle at $84.99 on Wednesday.
In London, Brent crude for April delivery fell 13 cents to $103.65 a barrel on the ICE Futures exchange. Earlier in the session, Brent reached $104.30, it highest point in over two years.
Wednesday's comments by Israeli Foreign Minister Avigdor Lieberman that Iran was about to send two warships through the Suez Canal helped boost oil prices, but Egypt said Thursday that the Iranians had withdrawn their transit application.
Analysts said the issue had been overblown as the Iranians had started their trip before the Cairo riots began and were on a "well publicized" trip to the Mediterranean.
"Those two ships will not represent any material threat but they are a bit of a symbolic provocation and the sort of fuel that quickly catches fire in a flat price market where sellers are absent -- at least in Brent," said Olivier Jakob of Petromatrix in Switzerland.
Anti-government street protests which toppled rulers in Tunisia and Egypt this year have helped spark demonstrations in Iran, Algeria, Jordan, Bahrain and Libya. Iran is the world's fourth-largest oil producer while Algeria and Libya are also important crude suppliers.
"Repercussions from Tunisia and Egypt have yet to be felt in their entirety and we expect that in the coming months, events emanating from the Mideast will create significant volatility in the energy markets," said Richard D. Soultanian of NUS Consulting.
In other Nymex trading in March contracts, heating oil fell 0.51 cent to $2.7697 a gallon and gasoline dropped 0.63 cent to $2.5384 a gallon. Natural gas futures were up 0.3 cent at $3.924 per 1,000 cubic feet.