Brent crude held above $107 on Friday, edging lower after a surge of 20 percent in four weeks prompted some selling as worries about conflict in the Middle East eased slightly.
Oil rose to an eight-week high in the previous session, gaining for seven straight days as escalating tension in the West Asian and disruptions in output in the North Sea stoked supply fears. A strengthening of the dollar after a recent slide is also supporting crude futures.
Brent crude slipped 49 cents to $107.31 a barrel by 0543 GMT. The contract settled up $2.64 and touched an intraday top of $108.18, the highest since May 22.
U.S. oil fell 76 cents to $91.90. The August contract ended up $2.79 and touched a high of $92.94, also the highest since May 22.
"Prices were getting stretched a little, getting a bit ahead of themselves," said Mark Pervan, senior commodities strategist at ANZ Bank. "This rally is supply driven, and supply-driven rallies tend to be very volatile because when prices go up, they threaten to hurt demand."
Brent is set to gain for a fourth straight week, its longest winning streak since the end of February, while U.S. oil is poised to gain for three of the past four weeks.
The most important supply threat to oil for now is from the West Asian as global powers try to force Iran to halt its disputed nuclear programme. Tension escalated after a bus carrying Israeli tourists was bombed in Bulgaria, for which Israel blamed Iran.
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Israel's allegation, based on suspicions that Iranian and Hezbollah agents have been trying for years to score a lethal strike on its interests abroad, triggered speculation in local media that the government might now hit back hard. Israel however signalled that it would not rush into any conflict.
The Middle East supply worries will limit any further slide in prices.
Apart these tensions, expectations that the U.S. Federal Reserve would announce another round of stimulus to boost growth may weaken the dollar, boosting oil and other dollar-denominated commodities.
"Middle East tensions now mean that supply concerns are entering the crude oil equation which is creating an upward price pressure," Tim Waterer, senior trader at CMC Market, said in a report.
"With the added element of potential QE3 keeping a lid on the dollar, it would appear that the recent rally in oil still has room to move on the upside with a return to $100 per barrel now a realistic proposition."
Supply woes
North Sea production problems, including the recent strike in Norway, are the other key supply worry. Nexen Inc said on Thursday it planned to take down its Buzzard oil field in the North Sea for several weeks of maintenance and a vessel inspection, starting in the first week of September.
Nexen said production at the 200,000 barrel a day oil field would stop during the work, and is expected to be back at full rates by the middle of October.
Brent will retrace to $106.29 per barrel as it did not break a resistance zone of $107.78-$108.31, while U.S. oil will retrace to $91.30 per barrel, according to Reuters technical analyst Wang Tao.
Yet worries about demand growth continue to put a ceiling on oil prices. The global economy will labour against a dismal tide from recession-hit Europe for the rest of this year, according to Reuters polls of hundreds of economists worldwide.
The global economy will grow around 3.2 percent in 2012 and 3.7 percent next year, the poll showed, a slight downgrade from April's poll and slower than the International Monetary Fund's reading of 3.9 percent for 2011.
(Editing by Miral Fahmy)