Brent crude futures held near $113 per barrel on Tuesday with the US considering air strikes in Iraq as the security situation worsens in the key oil producing country.

Islamic militants have routed Baghdad's army and seized the north of the country in the past week, threatening to dismember Iraq, although 3.3 million barrels per day of oil exports remain unaffected.

President Barack Obama met with top national security advisors on Monday to consider options for military action to support Iraq's besieged government.

"The situation is very difficult to evaluate, and for now the market is more let by psychological factors rather than any actual supply disruptions," said Tetsu Emori, a commodity fund manager at Astmax Investment.

Brent crude for August delivery had fallen 30 cents to $112.64 a barrel by 0320 GMT. The contract settled 48 cents higher on Monday, after touching an intraday high of $113.28.

U.S. July crude was down 25 cents at $106.65 a barrel, after closing 1 cent lower. The U.S. July contract expires on June 20.

Oil prices rose around 4 percent last week, the most since July last year, but have since lost some steam as the Iraqi government tightened security around oil infrastructure and oilfields.

"The government is carefully protecting the oil infrastructure, and for the time being we probably won't see any disruptions to supply," said Emori.

"But should it come to air strikes, I think we can see oil prices jump as much as $5 a barrel."

HUGE CHALLENGES IN IRAN TALKS

Further complicating the situation in Iraq, the Kurdistan Regional Government, whose position has strengthened in the north of the country, believes its share of total Iraqi oil sales should be as high as 25 percent, up from a current 17 percent, an official spokesman said.

U.S. and Iranian officials discussed the Iraq crisis although both ruled out military cooperation. The discussions were held on the sidelines of a meeting starting on Tuesday in Vienna as Iran and six world powers will try to narrow differences and end a decade-old nuclear dispute.

With time running short if a risky extension of the nuclear talks is to be avoided, negotiators face huge challenges to bridge gaps in positions over the future scope of Iran's nuclear programme in just five weeks.

A successful outcome could see additional Iranian crude exported to global markets.

Meanwhile, Russian natural gas exporter Gazprom reduced supplies to Ukraine on Monday after Kiev failed to meet a deadline to pay off its gas debts.

A dispute over price could disrupt gas supplies to the rest of Europe, potentially increasing demand for alternative fuels such as oil. – Reuters