Oil prices fell by 1 percent on Monday on news that US forces had killed Al-Qaeda leader Osama Bin Laden, after a decade of counter-terrorism efforts.

ICE Brent crude for June fell 78 cents to $125.11 a barrel at 0413 GMT, after shedding as much as $1.24 to $124.65. It was still within $2 of last month's 32-month high above $127. US crude slid 95 cents to $112.98.     

Participants in the oil market focused on whether the news would help unwind the risk premium attached to prices because of war in Libya and unrest in the Middle East and North Africa.

"There's probably a knee-jerk reaction to the extent that part of the geopolitical risk has been supported by al-Qaeda, so there will be an initial sell-off," said Jeremy Friesen, commodity strategist at Societe Generale, adding that the effect of the news on prices may wane later this week.

"Al-Qaeda is still a threat and it's independent from Bin Laden, but I think to the extent that he has been an important rallying point for that ideology, it's a positive."   

Oil was already down before the news about Bin Laden, after Nato air strikes over the weekend killed one of Libyan leader Muammar Gaddafi's sons and industry sources said that Saudi Arabia raised output in April.     

Gaddafi's youngest son and three grandchildren were killed in a Nato air strike, the Libyan government said on Sunday. Britain said that while it was not targeting the leader, it was homing in on the regime's military machine.

"What's happening in Libya is probably an event that will see Gaddafi moved out of his position, so the risk premium which relates to Middle East concerns will start to erode," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney, estimating that premium at about $18.

Saudi Arabia's crude oil output edged back up in April to around 8.5 million barrels per day (bpd) from roughly 8.3 million bpd in March as demand picked up, Saudi-based industry sources said on Sunday.

"Saudi Arabia has increased production, we know that the dollar is slightly better bid and you have big movements in the precious metals markets," Barratt said.

The dollar strengthened by about 0.25 percent on Monday following last week's slide, deterring investors from piling into commodities this week and triggering a 10 percent plunge in spot silver prices.  - Reuters