Brent crude futures dipped on Thursday, as investors worried after five days of gains that oil had become expensive enough to crimp economic growth and cut demand.
Prices also came under pressure after a major earthquake struck Japan, the world's third largest economy still reeling from last month's earthquake and tsunami.
Brent crude for May delivery dipped 15 cents to $122.16 a barrel by 12:10 p.m. EDT. It hit a 2-1/2-year high of $123.37 on Wednesday, as violence in the Middle East continued to stoke supply fears.
The news of another Japan earthquake may have panicked the market and prompted some profit taking, said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
There are signs crude futures are taking a breather after the rally to 2-1/2 year highs, but the upward momentum remains intact, McGillian added.
U.S. May crude futures rose 56 cents to $109.39 a barrel, after having hit $109.56, highest in 30 months, helped by U.S. government data showing weekly claims for unemployment benefits fell slightly, adding to signs of a firming labor market conditions.
ECB MOVE SPURS DEMAND WORRIES
As expected, the European Central Bank lifted interest rates for the first time since the 2008 financial crisis and signaled readiness to tighten further if needed.
The ECB raised rates by 25 basis points to 1.25 percent, which added worries about erosion of oil demand after China also lifted interest rates this week. Dealers also say markets may wobble as other central banks remove easy-money policies.
At current crude oil prices, the risk is turning more and more to the amount of potential demand destruction,' Petromatrix's Olivier Jakob said.
But other analysts pointed to supply uncertainty spawned by unrest in Middle East flashpoints and the conflict in Libya.
Euro zone debt worries and inflation are high on the agenda after Portugal overnight asked for an EU bailout and on concerns that a rise in euro zone interest rates would push up the cost of debt for already highly indebted economies.
Products futures are high enough that too much more and it could trigger some demand destruction, especially for gasoline, with supplies pretty ample in the U.S. But the Middle East and Libya keep the uncertainty in the market, said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
Oil prices slipped from recent 2-1/2 year highs even after rebels said Muammar Gadaffi forces damaged a pipeline connecting oilfields to the port town of Marsa el Hariga, with analysts noting supply disruptions are already priced in.
Prices are unsustainable at current levels in the absence of other disruptions, said VTB Capital analyst Andrey Kruychenkov said prices were
We can't possibly justify a further sustained boost to prices unless unrest erupts in an oil-producing country other than Libya with serious threats to crude supplies, Kryuchenkov said.
(Additional reporting by Robert Gibbons and Ed Mcallister in New York; Zaida Espana in London; Florence Tan in Singapore; Editing by David Gregorio)