Fighting between the government and Libyan rebels has affected oil exports from the country
Brent crude futures fell 2.9% to $105.5 a barrel, while US sweet, light crude fell 1.3% to $81.3 in trading in Asia.
Markets are hoping that an end to the conflict will see Libya's oil exports restored, increasing global supplies.
Libya is the world's 12th-largest oil exporter.
Analysts said prices were likely to fall further as the political situation in the country unfolds.
"As the world wakes up to the news, we will see more momentum
in the decline of oil prices," Jonathan Barratt of Commodity Broking
told the BBC.
Broader negative sentiment about the outlook for the global economy also weighed on the oil market.
The bearish tone, carried over from last week, also led to
modest losses on Asian stockmarkets and the price of gold hit yet
another record high.
Increased supplies?
Before the start of the conflict, Libya produced 1.6 million barrels a day of crude oil, or about 2% of the world's output.
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In the long run macroeconomic issues will play a huge role in determining which way the oil prices are headed”
Avtar Sandhu
Phillip Futures
But as the political unrest in
the country intensified, the majority of that production was hit, taking
a toll on global oil supply.
Analysts say that if the conflict ends, production numbers are likely to rise again.
"Once they get back to recovery mode, a million barrels per
day are expected to enter the global supply," said Commodity Broking's
Mr Barratt.
"This will add weight to the decline in oil prices that we have seen recently." he added.
However, some analysts said that even though the Libyan
conflict seemed to be heading towards an end, there was still
uncertainty about how fast the country's oil production could be
restored to the pre-conflict levels.
Last Updated at 22 Aug 2011, 07:00 GMT
*Chart shows local time
"It will take a long time for them to
repair the production facilities and get back on track," Avtar Sandhu of
Phillip Futures told the BBC.
"What we are seeing today is more of a psychological selling," he added.
Macroeconomic factors
Oil prices have also been hit by concerns that demand may be hurt by a slowdown in the global economy.
There have been growing concerns that the US may be slipping
back into a recession and that Europe's debt crisis will hurt growth in
the region.
"We can count on slower economic growth in US and Europe, and
that is going to impact demand for oil." Victor Shum of Purvin and
Gertz told the BBC.
Analysts said that, with two of the world's biggest economic zones struggling to boost growth, oil prices are likely to slide.
"Until the US and Europe can come up with a long-term
solution for sustainable growth, markets are likely to be subdued,"
Phillip Futures's Mr Sandhu said.
"In the long run, macroeconomic issues will play a huge role in determining which way the oil prices are headed," he added.
Japan threat
Worries about the weak recovery continued to scare investors away from riskier assets.
Asian stock markets fell in afternoon trading, with Hong
Kong's Hang Seng down 1.5% in late trading, while Tokyo's Nikkei ended
the day 1% lower.
Meanwhile haven investments continued to rise, with the price
of gold rising 2.3% to hit a record high yet again of $1,894.5 per troy
ounce.
The Japanese yen was close to its record level of 76.1 yen to the dollar set on Friday.
The country's finance minister Yoshihiko Noda reiterated the
government's readiness to intervene if the currency strengthened
further.
"We will watch markets even more closely than before to see whether there is any speculative activity," he said.
"We won't rule out any measures and will take decisive action when necessary."
The Swiss franc - another popular haven currency - held
steady at about 1.13 euros. The Swiss authorities intervened last week
to curtail the strength of their currency.
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