Oil dropped nearly 3 percent on Monday, falling from 32-month highs as concerns that rising fuel costs will erode demand and threaten the economic recovery spurred profit-taking.
In early activity, Brent crude extended its rally to top $127 a barrel and U.S. crude reached $113 due to ongoing concerns about unrest in Libya.
When crude turned negative, analysts and brokers cited technicals indicating it had become overbought in recent sessions, as well as a client recommendation from Goldman Sachs warning it saw a strong chance commodity prices may reverse and saying they should take profits.
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.
Brent crude for May fell $2.67 to settle at $123.62 a barrel after reaching a 32-month peak of $127.02. Brent slumped as low as $123 in post-settlement trading.
U.S. crude fell $2.87 to settle at $109.92, pulling back after reaching an early $113.46 peak, the highest intraday price since September 2008. U.S. crude fell more than $4 to $108.68 in post-settlement trading.
Technicals indicated crude was overbought, with RSI (relative strength index) for both Brent and WTI over 70 this morning, said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.
The 14-day RSI, a measure of whether a contract is overbought or oversold, approached 80 on Friday for Brent, according to Reuters data, before dipping below 70 on Monday. A reading above 70 is considered overbought, while anything under 30 is oversold.
We feel that the sell-off simply represented a deserved price correction following this month's upside acceleration, Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a note.
Oil has rallied in recent weeks as unrest in Libya has cut 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.
PRICE THREAT TO DEMAND
Concerns that rising gasoline prices could curb driving weighed on the market, with the U.S. Energy Information Administration reporting an 11 cent jump last week to an average $3.79 a gallon in pump prices across the country.
The average diesel fuel price jumped 10 cents to $4.08 a gallon, topping $4 for the first time since September 2008, the EIA said.
The International Monetary Fund warned in its World Economic Outlook 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 also 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.
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 on Tuesday.
(Additional reporting by Gene Ramos in New York, Claire Milhench in London and Florence Tan in Singapore; Editing by Dale Hudson and David Gregorio)