Oil slid below $68 today after Saudi Arabia offered to pump more to cover Nigeria's oil outage but was propped by investor fears of a potential disruption in Iranian supply.
Iran, the world's fourth-biggest crude exporter, could respond to Western pressure over its nuclear scheme by cutting back daily oil sales of 2.4 million barrels, analysts said.
US light crude fell 43 cents to $67.67 a barrel by 10.45am, adding to yesterday's losses when the market retreated from $69.20, the highest level since early September. London Brent crude shed 29 cents to $65.87.
"Bearish oil supply/demand fundamentals are hard to ignore. Inventories are comfortable," JPMorgan said in a report. "However, investor flows remain robust and geopolitical noise is pervasive."
These factors have pushed prices up 11 per cent since the start of the year. Saudi Arabia's Oil Minister Ali al-Naimi said world markets were in good shape, but promised that Riyadh would produce more oil if needed.
He also said that Opec was likely to keep output steady when it meets on January 31st in Vienna.
Tension has mounted, though, over Iran's nuclear ambitions, as US Secretary of State Condoleezza Rice said on Monday that Iran should be referred to the United Nations Security Council for possible sanctions.
Supply fears from Opec member Nigeria, the world's eighth largest crude exporter, were underlined by an attack yesterday on an oil platform operated by Italy's Agip, part of a month-long sabotage campaign by militants.
More than 220,000 barrels per day of Nigerian crude is still shut in, and militants are threatening more violence.