Oil prices dropped sharply Thursday on the news that China will raise domestic fuel prices and Iraq's potential output increase.

Light, sweet crude for July delivery fell $4.75 to settle at $131.93 a barrel on the New York Mercantile Exchange after falling as low as $131.60 a barrel.

China's top economic planner National Development and Reform Commission announced Thursday the country will raise the prices of gasoline, diesel oil, aviation kerosene and electricity, revealing an unprecedented broad plan to raise energy prices. Investors believed the move would dampen the demand of oil consumption in the emerging economy.

Also pressured on oil prices Thursday was the announcement of Iraqi Oil Ministry that it is close to signing oil service deals with several major Western oil companies in an effort to boost its crude output.

The dollar rose against the euro Thursday which also helped easing the oil prices.

Earlier in the day, crude futures surged to $137.82 a barrel on the news that an attack on a Royal Dutch Shell PLC oil field in Nigeria forced it to close operation. But prices soon retreated.

In London, Brent crude futures for August delivery fell $4.44 to settle at $132.00 a barrel on the ICE Futures Exchange.