Oil struck an all-time high above $81 a barrel on Tuesday, fuelled by concerns of a winter supply squeeze in top consumer the United States, where an anticipated interest rate cut was calming recession fears.
Hurricane and other supply risks, tightening U.S. fuel inventories and fund flows into energy from poorly performing equity markets have driven a rally that has taken U.S. crude to new record highs for five straight trading sessions.
U.S. crude was up 34 cents at $80.91 a barrel by 7:30 a.m. after hitting a record $81.24 and following a $1.47 jump on Monday. London Brent crude was off 14 cents at $76.84.
The market developed a momentum of its own when price movement coincided with tightness in the market, said David Moore, commodities strategist Commonwealth Bank of Australia.
In such a tight market there is potential for it to go up quite sharply without any major new news, but I actually expect some profit-taking at these levels to around $80, he added.
The U.S. Federal Reserve is expected to trim rates by at least 25 basis points on Tuesday to prevent a credit squeeze from pulling the economy into a recession, which analysts say would dampen oil demand.
The Organization of the Petroleum Exporting Countries, source of more than a third of the world's oil, shares that view. But its agreement last week to boost output by 500,000 barrels per day from November has done little to soothe concerns of fuel shortages this winter.
Some OPEC members say the exporters may have to pump more if oil stays above $80 for long. U.S. crude has climbed 33 percent this year.
If the high price lasts say more than 15 to 20 days there would at least be consultations between ministers. They'd have to do something about it, an OPEC source told Reuters.
Some analysts said oil's run-up was not supported by supply and demand fundamentals, a message sounded by OPEC as well.
It's all speculative I'm afraid, said Badung Tariono, of ABN Amro. Product prices are not spiking, only crude.
Though crude prices have quadrupled since 2002, when adjusted for inflation the price is below the $90 peaks of the Iranian Revolution in 1979.
Goldman Sachs on Monday forecast U.S. oil prices would surge to $85 a barrel by the end of the year, up $13 from its previous forecast, and said crude could climb as high as $90 due to tight supplies.
U.S. crude oil supplies probably dropped last week for the fourth straight week as imports shrank further, said industry analysts polled by Reuters ahead of Wednesday's government data.
Forecasts called for a 2 million-barrel draw in crude stocks, a 500,000-barrel decline in gasoline stocks and a 1.2 million-barrel build in distillates, which include heating oil, ahead of peak winter heating demand in the northern hemisphere.
(Additional reporting by Santosh Menon in London and Annika Breidthardt in Singapore)