Oil eased to below $79 a barrel on Wednesday, extending the previous session's decline from a one-year peak after a bigger-than-expected rise in U.S. crude oil inventories.
The American Petroleum Institute said crude stocks rose 3.8 million barrels, more than the forecast. Traders will be looking to Energy Information Administration figures at 1430 GMT (2:30 p.m. EDT) for confirmation.
The market has eased because of the stockbuild last night in the API stats, said Christopher Bellew, a broker at Bache Commodities.
Even the technical analysts, who are quite bullish about the market, are cautioning there is room for a correction in the short term.
U.S. crude for December fell 25 cents to $78.87 a barrel by 1351 GMT (9:51 a.m. EDT). Brent crude lost 11 cents to $77.13. On Tuesday, the November U.S. crude contract hit $80.05, a 12-month high for a nearby contract.
Oil pared much of its earlier decline as the dollar weakened against a basket of currencies. A falling dollar makes oil relatively cheap to holders of other currencies. The euro rose above $1.50 for the first time since August 2008.
Technical analysts, who use past price moves to predict future direction, noted oil's rally has left it looking overbought and, depending on the dollar, and the market could fall quite sharply.
We think the selling may have more room to go, particularly if the dollar strengthens slightly from here, said Edward Meir, analyst at MF Global.
In fact, we could perhaps sell off to the $75 level, which was trading range resistance that gave way last week.
The weak dollar and anticipation of future economic recovery have been among the drivers of the oil price rally this year, rather than market fundamentals of supply, demand and inventories.
The International Energy Agency, which represents 28 industrialized countries, has warned that the fast rise in prices could pose a risk to global economic recovery.
But Nigeria's oil minister, Rilwanu Lukman, said on Wednesday $80 was a fair price for oil and one that should encourage investment in new supplies.
(Additional reporting by Nick Trevethan in Singapore; editing by William Hardy)