Oil Drops Below $109 Per Barrel on Syria Deal

1. Gas Prices
Joe Raedle, Getty Images

By Lin Noueihed

* Brent, WTI crude fall by more than a dollar

* U.S., Russia back UN programme to destroy Syria's chemical weapons

* Coming up: U.S. industrial output at 1315 GMT

LONDON, Sept 16 (Reuters) - Global oil prices fell to a five-week low below $109 a barrel on Monday after the United States agreed to call off military action against Syria, easing supply concerns.

Benchmark front-month Brent futures touched a six-month high of $117.34 a barrel in late August amid worries that a possible U.S. military strike against Syria would disrupt Middle East oil supplies already hit by outages in Libya and Iraq.

But prices began to drop after Russia offered to help put Syria's chemical weapons under international control.

On Saturday, U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov agreed to back a nine-month U.N. programme to destroy Syrian President Bashar al-Assad's chemical arsenal.

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Brent crude for delivery in November dropped by $2.71 to trade around $108.99 at 0907 GMT, after hitting $108.73, its weakest level since Aug. 12.

The October contract expired on Friday, settling at $112.78.

U.S. oil for October delivery was trading down 82 cents a barrel at $107.39 at 0854 GMT after hitting a low of $106.48 earlier in the session.

"On the one hand you have a postponement of a military strike that alleviates geopolitical tensions and effects a downward force on oil. On the other hand, oil is supported as a risky asset class by the withdrawal of Larry Summers who was seen as the hawkish candidate," said Harry Tchillinguirian, oil analyst at BNP Paribas.

The decline in oil prices came despite weakness in the dollar, which typically makes dollar-denominated assets cheaper for holders of other currencies.

The dollar fell to a near four-week low against a basket of major currencies as investors bet that the U.S. Federal Reserve would take longer to end its stimulus programme after Summers, a former treasury secretary, withdrew from consideration to succeed Fed Chairman Ben Bernanke.

Tchillinguirian said uncertainty over who would succeed Bernanke and the direction of U.S. monetary policy would likely boost demand for risky assets such as dollar-denominated oiland put a floor under oil price declines for now.

The Federal Open Market Committee is meeting for two days from Tuesday with expectations high that policymakers will decide to reduce the monthly $85-billion bond purchases as they begin to end the era of cheap money that has boosted fund flows into commodities.

Credit Suisse said in a note it expects the Fed to pare down the monthly bond purchases by around $20 billion.

"A series of recent economic data improvements points in this direction and the weaker-than-expected August labour market report is unlikely to keep the Fed from proceeding with slowly winding down its asset purchases," the investment bank said.

(Additional reporting by Manolo Serapio Jr in Singapore; editing by Jason Neely)