Oil falls as Libya talks eyed; stocks off

Crude oil prices fell sharply on Monday after surging last week as investors warily eyed efforts to halt Libya's conflict, while the dollar rose against the euro after the US government averted a potential shutdown.

US stocks pared early gains to trade down slightly, with investors nervously awaiting companies' quarterly results to see if earnings would be strong enough to spark further gains in equities.

Aluminum maker Alcoa will mark the unofficial start of the quarterly earnings season when it reports results after the market's close. Profits at S&P 500 companies are seen rising 11.4% from a year ago, according to Thomson Reuters data.

"There's a question of whether companies can meet the fairly optimistic expectations," said John Carey, portfolio manager at Pioneer Investment Management in Boston, which has about USD 260 billion in assets under management. "There's potential for disappointment, but if they come in line or above, the market could experience a continued rally."

The Dow Jones industrial average was down 18.99 points, or 0.15%, at 12,361.06. The Standard & Poor's 500 Index fell 6.11 points, or 0.46%, at 1,322.06. The Nasdaq Composite Index lost 16.53 points, or 0.59%, at 2,763.89.

ICE Brent crude for May was last down USD 2.06 at USD 124.59 a barrel. US crude for May delivery fell USD 2.39 cents to USD 110.39 a barrel. US crude fell further after long-term commodity bull Goldman Sachs recommended clients take profits after recent 30-month highs.

The African Union said Muammar Gaddafi had accepted a road map to end the civil war, but forces loyal to him shelled the town of Misrata. A broker said oil also fell on profit-taking.

Analysts were skeptical about the peace deal, and even if an end to the civil war were in sight, it will be some time before Libyan exports return to pre-conflict levels.

"Some of Libya's oil fields, which have recently come under attack, have suffered severe damage, which is likely to have a long-lasting negative impact on the country's production profile," said Amrita Sen at Barclays Capital. "We don't believe there is reason to be optimistic even if Gaddafi were to step down, as the power vacuum would be very large."

World stocks as measured by MSCI were down 0.3%, with emerging markets off 0.6%. European stocks fell, with the FTSEurofirst 300 index of top European shares down 0.2%.

Although the world economy is fairly robust, investors increasingly expect higher commodity prices to drive up inflation, prompting central banks to tighten monetary policy.

The International Monetary Fund said on Monday it did not believe that rising commodity prices will derail the global economic recovery but warned that inflation will remain elevated for a while.

Greenback's gains limited

The dollar rose against the euro after the US Congress on Friday reached a last-minute budget deal that avoided a government shutdown, though traders said the focus on the US debt ceiling debate could limit any gains.

A rebound in the dollar was also overdue after it fell against the euro over the past four months. For the month of April, the dollar was still down about 2%.

The euro fell 0.3% to USD 1.4433, after hitting a 15-month high around USD 1.4486 on Friday.

"The euro's drop today is nothing more than white noise and the pullback should prove shallow," said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in New York.

Hoversen said the dollar's negative tone should remain in place as long as the US Federal Reserve keeps interest rates low and while central banks abroad, namely the European Central Bank and Bank of England, move closer to more normal borrowing costs.

Expectations of another rise in European Central Bank interest rates by July kept the euro close to recent highs and pushed euro zone government bond prices lower. German Bund yields briefly rose above 3.5% for the first time since August 2009.

The yen was off an 11-month low against the euro and a two-and-half year trough versus the Australian dollar as another earthquake in Japan led some investors to close riskier bets funded by cheap borrowing in the Japanese currency.