Oil prices slide 2 pct on proposal to avert Syria strike

By Jeanine Prezioso

NEW YORK (Reuters) - Benchmark Brent oil prices posted their biggest decline in nearly three months on Monday, diving as much as $3 a barrel as new proposals to clamp down on Syria's chemical weapons eased fears of an imminent military strike against the country.

Oil prices fell despite a weaker dollar and rising equity markets. Brent closed at its lowest price since August 26, when traders began building in a geopolitical risk premium attached to the possibility of wider disruption in the Middle East.

U.S. oil futures, less directly exposed to Middle East supplies than Brent, fell more modestly, narrowing their discount to Brent by more than $1 to the smallest differential in three weeks.

On Monday, Russia seized on a remark by U.S. Secretary of State John Kerry to say Damascus should save itself by handing over chemical weapons. Kerry had suggested Syrian President Bashar al-Assad could avert U.S. strikes by surrendering his chemical arsenal, but later said his remarks were rhetorical and not meant as a proposal.

The White House said it would examine Russia's proposal to place Syria's chemical weapons under interim control. Meanwhile, Obama is struggling to convince Congress to approve a military strike, while a new Reuters/IPSOS poll shows that American opposition to such a move had risen to 63 percent.

"This has thrown some sand into the wheels of military preparation in the U.S.," said Michael Lynch, an oil analyst and president of consultancy Strategic Energy & Economic Research Inc in Winchester, Massachusetts. "At the very least, it means the debate is going to be stalled while we wait and see if it works out."

There is a chance now that a U.S.-led military strike could be "put on hold and possibly deterred altogether," Lynch added.

President Barack Obama will give a televised address to the nation on Tuesday, making the case for intervention.

Brent crude oil for October delivery settled $2.40 per barrel lower, or 2.07 percent, at $113.72 a barrel, with losses deepening to $113 in post-settlement trade. It was the contract's largest one-day percentage loss since June 20.

Front-month U.S. crude oil futures settled $1.01 per barrel lower at $109.52 a barrel, after trading as low as $109.26.

Brent's premium to U.S. crude oil settled at $4.20, its narrowest close since August 19.

French investment bank Societe Generale said it was closing its long Dec-13 Brent position "as a U.S. military strike on the Syrian regime looks significantly less likely and there appears to be some sign of progress in resolving the Libyan crude oil output disruption."

The global oil market has been coping with a loss of additional supplies from Libya.

The decline in oil prices occurred despite some signs of global economic recovery in China and Japan, which would stoke oil demand.

"Economic news is pretty good, positive and bullish for prices, but we're being overwhelmed by Syria," Lynch added.

The market was also eyeing Tropical Storm Humberto which formed near the Cape Verde Islands on Monday and was expected to strengthen into the first hurricane of the Atlantic storm season.

A hurricane could potentially pose a threat to the oil and gas producing Gulf of Mexico, which accounts for 23 percent of total U.S. crude oil production.

U.S. crude oil stocks likely fell last week by an average of 2 million barrels, a Reuters poll forecast.

(Additional reporting by Osamu Tsukimori in Tokyo and Ron Bousso in London; editing by William Hardy, David Gregorio and Jim Marshall)