Brent crude fell to around $123 a barrel on Tuesday, extending overnight losses, on concern high fuel prices will destroy demand and after Goldman Sachs advised investors to lock in commodity trading profits.
ICE Brent crude for May fell nearly 1 percent to $123.05 at 0633 GMT, paring losses from a low of $121.97 after hitting a 2- year peak of $127.02 a barrel on Monday.
U.S. crude for May delivery fell 1.2percent to $108.63 a barrel. Earlier, prices dipped to $107.87 after having touched a 2- year high on Monday at $113.46.
Pressure on prices emerged after long-term commodity bull Goldman advised its clients on Monday to take profit as there is a strong chance that commodity prices may reverse.
It 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.
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 who declined to be named.
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, he said.
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.
The IMF's change of view on the U.S. economy is a catalyst which suggest high costs of imports will affect economic growth, said Jonathan Barratt, managing director Commodity Broking Services in Sydney.
Demand concerns also heightened in 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.
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.
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.
The U.S. Commodity Futures Trading Commission said that as of last Tuesday, hedge funds and other financial traders held a total net-long positions in U.S. crude contracts equivalent to a near record 267.5 million barrels.
This could be interpreted as an overbought level, ANZ's analyst Serene Lim said. If there is bearish sentiment in the market, it may trigger a sell-off, and a cycle of long liquidation.
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.
(Additional reporting by Florence Tan in SINGAPORE; Editing by Ed Lane)