Oil fell $4 to below $90 a barrel on Tuesday, plummeting from its record high in a broad commodity sell-off sparked by uncertainty over how aggressive the U.S. Federal Reserve will be in fueling economic growth.
Profit-taking was encouraged by an expected recovery to Mexican oil exports disrupted since last week by foul weather, and forecasts that a government report to be released Wednesday would show an increase in U.S. crude stocks.
U.S. oil futures fell $4.00 to $89.53 a barrel after settling at $90.38, bringing prices well below Monday's record high of $93.80. London Brent fell $3.50 to $86.82 after settling at $87.44.
Gold and other metals also tumbled on Tuesday.
The energy markets are in a profit-taking mentality at this point, reacting to the dollar and with uncertainty that has developed over whether the Fed will cut interest rates, said Andy Lebow, broker at MF Global in New York.
Federal Reserve policy-makers began meeting on Tuesday against the backdrop of a still-plummeting U.S. housing market that is sapping consumer optimism.
Futures markets are betting on a quarter-percentage-point cut, but a report in the Wall Street Journal had earlier raised doubts that the Fed would act -- firming the dollar and hitting commodities markets.
Oil prices gained nearly $12 a barrel since the start of October as they raced to a record $93.80 per barrel on Monday, in part driven by investment banks covering options positions with producers, Lehman Brothers said.
To hedge their (options) positions, they had to buy underlying oil, which in turn pushed the price of oil closer to ($90), the bank said in a research note.
Adding pressure on Tuesday, Mexican state oil company Pemex said it could resume production later in the day after shutting a fifth of its output and halting exports due to bad weather -- the second disruption in as many weeks.
Mexico is a top-three oil supplier to the United States.
Meanwhile, energy analysts said they expected the U.S. Energy Information Administration's weekly report Wednesday to show an increase in U.S. crude stocks last week of 600,000 barrels, buffing up inventories that are running about 6 percent below a year ago.
A pause before the weekly inventory reports is not inappropriate, particularly with idled Mexican production returning to market, Mike Fitzpatrick, vice president at MF Global, wrote in a report.
OPEC DEFLECTS BLAME
Oil group OPEC has shrugged off calls from importer nations to cool prices by raising crude output, blaming politics and speculation -- not a supply shortfall -- for $90-plus oil.
Please don't blame us for $93 oil, Qatari Oil Minister Abdullah al-Attiyah told reporters at an international energy conference in London. The market is out of control.
U.S. investment bank Goldman Sachs said oil prices could break the $100 mark as risks such as cold winter weather, a U.S. Federal Reserve rate cut, rising costs and geopolitical turmoil remained.
The bank, which recommended taking profits in oil and gold in the short-term, said the recent oil rally was due to fundamental factors and not speculation.
In fact, speculative money is at the same level it was in August when we were at $72 a barrel, the note said.
(Additional reporting by Elena Moya and Jane Merriman in London)