Brent and U.S. crude fell more than $1.50 a barrel on Tuesday in on concerns demand may wane on high fuel prices and after Goldman Sachs advised investors to lock-in trading profits before oil and other commodity markets reverse.
Brent crude fell as low $121.97 a barrel while U.S. crude dropped to a low of $108.15 a barrel.
Open interest has been building up since the start of the new quarter in April, reflecting fresh inflows of speculative money into the oil market, said an energy analyst at a leading Japanese trading house.
In a report to clients, Goldman noted nascent signs of oil demand destruction in the United States that could drag prices down, as well as the possibility of a Libya ceasefire. The bank also said Nigeria's elections, which had added further risk to oil markets, had thus far not caused supply disruptions.
The Goldman report put a damper on this flow, at least for now, given that there was a sense of an overshoot in the market, the energy analyst said.
Reuters technical analyst Wang Tao also saw further retracements for Brent and U.S. oil.
DEMAND, MIDDLE EAST
Weekly oil inventory reports will offer a fresh snapshot of U.S. demand and stockpiles. Analysts surveyed on Monday expected crude stocks to have risen last week, with distillate stocks dipping and gasoline stocks dropping.
Oil data from industry group the American Petroleum Institute is due at 4:30 p.m. EDT (2030 GMT) on Tuesday.
The International Monetary Fund warned in its World Economic Outlook on Monday that soaring oil prices and inflation in emerging economies pose risks to the world economy but are not yet strong enough to derail it.
Demand concerns however remain for No. 3 oil consumer Japan, where the evacuation zone around its damaged nuclear plant was expanded because of high levels of accumulated radiation, as a strong aftershock rattled the area.
Support for the market comes on continued unrest in Libya, which has cut export supplies from the OPEC member. An African bid to halt Libya's civil war collapsed on Monday after Muammar Gaddafi's forces shelled a besieged city and rebels said there could be no deal unless he was toppled.
With Libyan production curbed sharply, Saudi Arabia has raised output. A senior Gulf source dismissed doubts among analysts about Saudi Arabia's claimed 12.5 million barrels per day capacity, saying such doubts were the work of speculators trying to manipulate oil prices.
(Reporting by Risa Meada and Chikako Mogi; Editing by Ed Lane)