Oil dropped below $126 today after a regulatory probe into possible price manipulation added to trader caution and a stronger US dollar offset the impact of a big drop in US crude stocks.
US crude dipped 77 cents to $125.85 a barrel by 11.30am. London Brent dropped 49 cents to $126.40.
Prices hit an all-time high of $135.09 a barrel last week, driven by concern supplies will struggle to match demand over the long term, as well as a weak US currency, which makes dollar-denominated commodities attractive to investors.
Since then, the market has fallen by around $10, pulled lower by mounting evidence that in the short term high prices have begun to erode demand.
An announcement yesterday of an investigation by US regulator the Commodity Futures Trading Commission (CFTC) heightened the cautious mood.
"A rebound in the dollar, speculation about US interest rate hikes and the announcement by the CFTC of measures to enhance the oversight of energy futures markets may be seen as potentially stemming future investment flows into energy and other commodities," said Antoine Halff of Newedge USA.
The dollar, which had fallen to record lows against the single European currency, rallied on Friday after data drove concern about a weaker European economy.
US crude fell by more than $4 a barrel yesterday even though US government data showed US crude stocks had fallen to their lowest level since 2004.
Demand from US oil refiners has increased following the onset of the US driving season.
But motorists have cut back on use and traders also expected Asian consumption to fall because of the reduction of fuel subsidies in some Asian countries, which have been costing governments millions.