Brent crude had slipped 33 cents to US$113.70 per barrel by 0525 GMT, after ending up 43 cents at the highest settlement since May 3
Brent crude futures slipped below US$114 on Wednesday after settling at a three-month high as supply disruption worries eased after the US said it did not believe Israel had made a decision whether to attack Iran.
Concern about the potential for military conflict in the Middle East over Iran's disputed nuclear programme has supported oil prices this year, pushing Brent to a high of more than US$128 a barrel in March, despite a worsening demand growth outlook. A surprise jump in stockpiles in the US is also weighing on prices.
Brent crude had slipped 33 cents to US$113.70 per barrel by 0525 GMT, after ending up 43 cents at the highest settlement since May 3. US crude fell 37 cents to US$93.06 after closing 70 cents higher.
"We are probably seeing a bit of a reaction to the crude inventory figure and also comments from the United States about there being time for diplomatic action to resolve the Iran issue," said Ric Spooner, chief market analyst at CMC Markets. "We are back in what we can call a neutral zone for oil prices."
The European benchmark will trade between US$110 and US$115 unless there is a major supply shock or demand growth forecasts are cut further, Spooner said, adding that the US contract would stay around US$95 to US$98.
Brent has swung between a high of more than US$128 per barrel and a low of US$88.49 this year. The trading range of nearly US$40, resulting from heightened Middle East supply worries and a weakening growth outlook, is the widest since 2009, when it was US$40.91. In 2011, the range was US$34.65 and in 2010, US$27.33.
"Oil has now rallied some 20 percent since the lows in June, putting it back into equilibrium," Spooner said.
The European benchmark is biased to fall to US$112.50 per barrel as its consolidation in a US$113.14-US$114.68 range indicates the rise from the August 1 low of US$104.06 has ended, while US oil looks neutral in a range of US$92.05-US$94.14 per barrel, according to Reuters technical analyst Wang Tao.
There is still time for sanctions and diplomatic pressure to work, and the US does not believe Israel has made a decision on whether to attack Iran, Defense Secretary Leon Panetta said on Tuesday. Panetta, who visited Israel two weeks ago, told reporters it was important that military action be the "last resort".
The comments helped ease worries of a conflict after Israel's Prime Minister Benjamin Netanyahu said on Sunday that most threats to Israel's security were "dwarfed" by the prospect of Iran obtaining nuclear weaponry.
A surprise increase in stockpiles in the world's biggest oil consumer is also weighing on prices. Total crude inventories rose 2.8m barrels in the week to August 10, the American Petroleum Institute said, compared with analyst expectations for a 1.7m-barrel drawdown.
The API data will be followed by more closely watched numbers from the US Energy Department later today, providing a pointer to the country's demand growth outlook.
"If the EIA has similar oil stock figures as API, it would be overall bearish," said Tony Nunan, a risk manager at Mitsubishi Corp said.
Oil may also be under pressure from growing expectations that the US Federal Reserve is unlikely to immediately announce measures to stimulate growth following better-than-expected July retail sales numbers.
The broad expansion in retail sales has bolstered the view that the slowdown in economic growth during the second quarter will prove temporary.
"The US Fed is less likely to do something in the next meeting," Spooner said. "It will be happy to sit back and see how the economy develops."
Yet Brent futures are unlikely to dip much further, with a drop in North Sea crude output and lingering supply worries putting a floor under prices.
"Crude might get stronger because of the issues with North Sea production," said Victor Shum, a consultant at IHS Purvin & Gertz. "Definitely the Iran sanctions are already starting to have an effect, and we can see the obvious effects on crude prices."