(Reuters) - Brent crude oil retreated on Monday below $126 and U.S. crude futures slipped as the African Union signaled progress in Libyan peace talks yet government forces continued their bombardment of Misrata.
At 1337 GMT, ICE Brent crude for May was down 70 cents to $125.95 a barrel after hitting an intraday low of $124.69 a barrel, down almost $2.
U.S. crude for May delivery was down by 53 cents to $112.26 a barrel after earlier slipping to $111.53.
The African Union said Libyan leader Muammar Gaddafi had accepted a roadmap to end the civil war in Libya, including an immediate ceasefire, but forces loyal to Gaddafi continued to shell the besieged town of Misrata.
A NATO official said the alliance would target Gaddafi's forces as long as they threatened civilians.
"It does not appear that this indication of a peace deal has any substance at this point," the official said.
An oil broker said the market was also selling off due to profit-taking. "The market looked very toppy indeed -- on Friday the market was 90 percent overbought on crude and I feel that needs to unwind a bit, which it is doing."
Analysts are skeptical about the Libyan peace deal. Commerzbank's Carsten Fritsch said: "We have seen such peace plans before... Unless Gaddafi steps down I think there is little room for discussion from the rebel side."
Even if an end to the civil war is 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."
The conflict in Libya has cut the country's 1.6 million barrels per day oil output by around 80 percent, with much more of an impact on Brent prices than U.S. crude.
Brent surged over $4 on Friday to settle above $126 a barrel, its highest level in 32 months, as commodities rallied due to a weaker dollar and continued fighting in Libya.
"Oil prices have now reached levels that are no longer justified," said Commerzbank's Fritsch. "It is largely being driven by fear at present and not by actual supply bottlenecks."
Only if another oil producer of Libya's size drops out of the market will spare capacities sink to a critical level, Fritsch said
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