Brent crude futures extended losses and slipped below $124 on Tuesday, snapping a surge that threatened to hurt the global economy while concerns over supply from the West Asia helped stem the slide.
Broader financial markets consolidated after sliding on fears that the rise in oil to near 10-month highs last week would further strain the economies of Europe, already struggling with a debt crisis. Brent has risen more than 11% this month, the most since May 2009.
Front-month Brent fell 41 cents to $123.76 a barrel by 0733 GMT, after settling more than $1 lower on Monday. US crude slipped 29 cents to $108.27 a barrel, after ending more than $1 lower and snapping seven straight days of gains in the previous session.
"People were worried about the quick move in prices - they just sped up too fast," said Tetsu Emori, a fund manager with Astramax Co. in Tokyo.
"We may see some more correction and participants repositioning themselves before prices start to rise again."
Brent may slip to $120 a barrel, while US crude may fall to $105 before finding support, Emori said. Oil may rise after that as tensions with the West over Tehran's disputed nuclear programme continue to escalate, he said.
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The surge in prices, an increase of more than 3% in January for Brent in addition to the 11% this month, has already prompted the International Monetary Fund to flag oil as a rising threat to the global economy.
"There has been no change. In fact, the fundamentals are getting much more tighter," said Emori.
Brent will average $110.3 a barrel this year, according to a Reuters monthly oil poll, up from January's estimate of $107.30 due to fears of a loss of Iranian supplies.
Supply outlook
Apart from Iran, oil markets are already coping with a disruption in shipments from other smaller producers such as South Sudan and Syria.
More than 1 million barrels per day (bpd) of supply is estimated to be offline - 1.1% of daily world demand - including Libyan output yet to return after the virtual shutdown of its oil sector during the 2011 civil war.
"There are more upside risks than downside risks to oil prices because of supply concerns," said Victor Shum, senior partner at oil consultancy Purvin & Gertz.
"Supply side risks are not just limited to Iran, but also other countries such as South Sudan and Syria."
Yet, investors are concerned about demand as the euro zone economy is in danger of tipping into recession. Standard & Poor's on Monday cut Greece's long-term ratings to 'selective default', becoming the second ratings agency to proceed with a widely expected downgrade.
Greece is proceeding with scheduled steps to restructure its huge debts, setting a March 8 deadline for private holders of its bonds to participate in an unprecedented bond swap.
Crude is also under pressure from expectations that stockpiles at the world's biggest oil consumer, the United States, rose for a second straight week due to higher imports.
China's official purchasing managers' index, which measures activities in the vast manufacturing sector, would be the next key indicator of oil demand growth.
Brent is expected to revisit the February 24 high of $125.55 per barrel, as it could have completed a correction from this level, while US oil may drop more to $106.26 per barrel, according to Reuters market analyst Wang Tao.