Oil prices pared gains on Monday, April 2, as concerns about a U.S.-China trade quarrel offset gains related to curtailed drilling activity in America.

U.S. benchmark West Texas Intermediate futures contracts for May delivery fell 2% to $63.61 at 11 a.m. New York time. Brent crude futures, the global benchmark, fell 1.4% to $68.37.

WTI futures had been rising above $65 a barrel heading into the week after a long holiday weekend as the decline in active rigs eased some concerns about surging shale production. U.S. oil producers brought seven rigs offline for the week ending March 29, cutting the U.S. oil rig count to 797, according to oilfield services giant Baker Hughes (BHGE) - Get Report . While it was the first decrease in oil rigs in three weeks, there are an additional 135 active oil rigs than there were during the same period last year.

But China announced that it is implementing new tariffs on 128 products from the U.S. in retaliation against U.S. duties on imported steel and aluminum. China's Customs Tariff Commission is increasing the tariff on eight products, including pork products and aluminum scrap, to 25% while also imposing a new 15% tariff on 120 other imported products, such as fruits and steel pipes, the latter of which can be used for petroleum or natural gas. The new tariffs went into effect on April 2.

"Increasing trade friction between China and the U.S. is likely to rock global markets and tarnish bullish sentiment in crude oil markets," Wang Xiao of Guotai Junan Futures told Reuters.

China said in a statement that it hopes the U.S. "will withdraw the measures that violated the rules of the WTO as soon as possible, so that trade of related products between the United States and China will return to normal track." China also said that the two sides should resolve their concerns through dialogue and consultation.

The drop in oil prices sent the broader energy sector lower Monday. The Energy Select Sector SPDR ETF (XLE) - Get Report , which holds oil giants including Exxon Mobil Corp. (XOM) - Get Report , Chevron Corp. (CVX) - Get Report and Schlumberger Ltd. (SLB) - Get Report , fell 1.9% to $66.13 at 11:15 a.m.  

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The slump in oil prices also comes ahead of an inventory report by the American Petroleum Institute, which could cause the prices to fluctuate even more.

The API inventory report was mixed for the month of March, with actual inventory data beating forecasts twice and missing estimates twice. Last week, API showed crude building by 5.321 million barrels last week, greatly surpassing forecasts calling for 1 million barrels.