Brent crude was firmer at around $124.50 a barrel on Tuesday, edging up from a sharp fall the previous day, as the International Energy Agency issued a fresh warning that high fuel prices could erode demand.
ICE Brent crude for May was down 28 cents up at $124.26 at 0853 GMT, paring losses from a low of $121.97 after hitting a 2-1/2 year peak of $127.02 a barrel on Monday.
U.S. crude for May delivery fell 30 cents to $109.60 a barrel. Earlier, prices dipped to $107.87 after having touched a 2-1/2 year high on Monday at $113.46.
Mounting worries that strong crude oil prices are beginning to dent oil demand growth were crystallised by a fresh warning from the IEA, which said prices could ultimately self-regulate through a global economic slow-down.
Despite the warnings, analysts said Brent was finding support after the agency kept its forecasts unchanged while another said the benchmark should find technical support at around $122 a barrel. "The report is not as bad as expected in the sense that while they talk about potential demand destruction, they have not changed their numbers," Petromatrix analyst Olivier Jakob said.
The warning from the agency, which advises industrialised nations on energy policy, followed a note from long-term commodity bull Goldman late on Monday advising clients to take profit on chances that commodity prices may reverse.
"There are real risks however that a sustained, $100 per barrel plus price environment will prove incompatible with the currently expected pace of economic recovery," the IEA said in its monthly report.
"The IEA monthly report should prevent further strengthening of the oil price," Commerzbank analyst Carsten Fritsch said.
Societe Generale also weighed into the demand destruction debate, highlighting gasoline in the United States as the likeliest first casualty.
"In the US, where low taxes on refined products for end-users cause a rapid and direct pass-through of underlying costs, the focus on increasing gasoline prices has been intense in both the business and general media," the bank's analysts wrote in a note. "This has driven mounting concerns in the oil makets about "demand destruction" in the US".
Demand concerns also heightened in No. 3 oil consumer Japan, where the evacuation zone around its damaged nuclear plant was expanded because of high levels of accumulated radiation, as a strong aftershock rattled the area.
Weekly oil inventory reports from industry group the American Petroleum Institute (API) will offer a fresh snapshot of U.S.
Analysts surveyed on Monday expected crude stocks to have risen last week, with distillate stocks dipping and gasoline stocks dropping.
The U.S. Commodity Futures Trading Commission said that as of last Tuesday, hedge funds and other financial traders held a total net-long positions in U.S. crude contracts equivalent to a near record 267.5 million barrels.
"This could be interpreted as an overbought level," ANZ's analyst Serene Lim said. "If there is bearish sentiment in the market, it may trigger a sell-off, and a cycle of long liquidation."