Brent crude fell to $123 on Monday and US crude dropped by more than $1 on fears that high prices were hurting demand, after a cut in output from oil exporter Saudi Arabia, which said the market was over-supplied.
The kingdom reduced output by 800,000 barrels per day (bpd) to 8.292 million bpd in March from February, Saudi oil minister Ali Al Naimi said on Sunday. "The market is over-balanced," he said.
The Kuwait oil minister on Monday added that high oil prices could form a significant economic burden for many import-dependent countries.
ICE Brent crude was down 55 cents at $122.90 a barrel by 0830 GMT while US crude fell 70 cents to $108.96 a barrel. Earlier it had fallen over $1 to $108.55.
Carsten Fritsch, an analyst at Commerzbank in Frankfurt, said the market was down in reaction to the Saudi statement.
"They said they made the cut because of over-supply and weak demand. That should further the discussion as to whether high oil prices are starting to dampen oil demand," Fritsch said.
On Monday, Naimi warned of continued weakness in the global economy: "The recovery remains patchy," he said.
Oil prices fell early last week on concern demand may be eroding under pressure from high prices, but rebounded on Friday following encouraging US economic data.
Brent has retreated from a 32-month peak of $127.02 hit earlier this month.
The conflict in Libya escalated over the weekend, after Muammar Gaddafi's forces fired rockets on Sunday at rebels stationed along the edge of Ajdabiyah, sending some residents fleeing from the eastern town, witnesses said.
The oil market is still seeking a close replacement for very high quality Libyan sweet crude oil lost due to the conflict in the North African nation, OPEC secretary general Abdullah Al Badri said on Monday.
Refiners have shown little appetite for a replacement blend offered by Saudi Arabia to plug the gap.
The dollar strengthened against the euro after Finnish voters handed the anti-euro party True Finns a crucial role in parliament and possibly government. A stronger dollar makes oil more expensive for buyers using other currencies.
The True Finns have said they will oppose a bail out for Portugal, and Finland requires parliamentary approval to participate in any bail out package.
"It shows rising resistance in countries that are supposed to give the money," said Fritsch. "Finland is one of only four countries in the eurozone that are supposed to be payers."
Eurozone consumer confidence figures for April are due later on Monday. "If it is down sharply, it could be seen as further confirmation that higher oil prices are starting to weigh on sentiment and will hurt demand going forwards," said Fritsch.
China raised banks' required reserves on Sunday for the fourth time this year to curb inflation, but the impact on oil prices was muted as further tightening in Chinese monetary policy was widely expected, analysts said.
The market will be closely watching a clutch of key US corporate earnings during this holiday-shortened week to gauge the impact of high oil and commodities prices on the world's biggest energy consumer.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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