Oil prices had surged overnight on an Iranian media report about a pipeline fire in Saudi Arabia, but Saudi officials later issued a statement denying the report.
New York's main contract, light sweet crude for delivery in April, shed one cent to $108.83 and Brent North Sea crude for April delivery was down 22 cents to $125.98 in morning trade.
"The rise in prices overnight was driven by news that there was a fire in Saudi Arabia but that report has now proven to be false and prices have retreated," said Victor Shum, senior principal at Purvin and Gertz global energy consultants in Singapore.
"There is a small level of profit-taking... but the intensifying worries of Iran will continue to keep a high floor on oil prices," he told AFP.
"The market's reaction to the news shows that the oil market is really sensitive to supply disruptions," he added.
Oil-producing Iran is locked in a diplomatic row with major Western powers over its nuclear program, which the West says is aimed at building an atomic bomb.
Meanwhile, traders were noting positive economic data from the United States and China signaling rising demand in the world's top two oil consumers, analysts said.
The US Labor Department on Thursday said claims for US unemployment benefits had fallen to levels last seen in March 2008.
A total of 351,000 initial jobless claims were made last week, a decline of 2,000 from the previous week.
China's manufacturing activity expanded for the third straight month in February as export orders improved, official data showed Thursday.
The official purchasing managers index rose to 51 in February from 50.5 in January, with most sectors showing signs of improvement, the China Federation of Logistics and Purchasing said in a statement.
A reading above 50 indicates industry is expanding while a reading below 50 suggests it is contracting.