Oil dropped to the lowest level this month on Tuesday as energy experts said the world will remain flush with surplus oil this year despite the loss of Libya's exports and increased demand from Japan.
Oil was also pushed down after Goldman Sachs warned investors that the price had already topped its second-quarter forecast and is due for a "substantial pullback" in the near term. Traders took special notice of Goldman's warning because the investment bank is considered a big player in oil markets, and it's known for bullish price forecasts.
Benchmark West Texas Intermediate crude for May delivery gave up $3.67, or 3 percent, to settle at $106.25 per barrel on the New York Mercantile Exchange. Oil dropped as low as $105.47 earlier in the day.
Goldman analyst David Greely noted that global supplies remain "adequate" even though the rebellion in Libya shut down production there.
In March, Greely increased his forecast for Brent crude by $4.50 per barrel to $105 per barrel because of the Libyan uprising. Greely said OPEC was forced to ramp up oil production so much that it would have difficulty stabilizing prices if another conflict were to occur. On Tuesday, Greely revised his opinion, saying the industry still has a healthier supply of oil than it did in the spring of 2008, when oil started its historic rise to record levels.
Analyst and trader Stephen Schork pointed out that anyone who bought oil contracts last week paid between $107.58 and $112.94 per barrel. If oil continues to hold below that level, it could trigger a wider sell-off.
"If they panic, we could be at $100 (per barrel) in no time," Schork said.
Prices fell from two-year highs on Tuesday as some of the industry's primary data-collecting agencies released monthly forecasts showing that refineries should remain well supplied with oil despite growing demand from China and other emerging economies. Oil prices had surged 33 percent since the middle of February, when Libya's uprising raised fears that world supplies would be squeezed this year.
The International Energy Agency said Tuesday that a supply crisis has been averted, in the short term at least, as Saudi Arabia, Kuwait and the United Arab Emirates boost production to offset the loss of Libya's 1.5 million barrels of daily oil exports. Platts reported that increased production from OPEC countries covered some, but not all, of lost Libyan production in March.
Both OPEC and IEA warned that high energy prices are starting to force people to conserve. "High prices are already starting to dent demand growth," IEA said in its monthly report.
Economists have been looking for signs that consumers are starting to balk at higher energy prices. Industry surveys of gasoline purchases suggest that motorists have started to drive less, though some analysts, including those at Barclays Capital, say they haven't seen a "considerable impact" yet.
Analysts say it's unclear whether oil is headed for a correction and lower prices. They note that the price of oil fell by a greater amount on March 15 than on Tuesday. The March drop happened as Japanese authorities struggled to stabilize nuclear generators after the region was rocked by a devastating earthquake and tsunami.
"The trend is still up" for oil prices, said Tom Bentz, director of BNP Paribas Commodity Futures. But he added, "I don't know how long we can keep seeing increases in inflation across the board — food inflation, energy inflation — and how long we can see that go on without having some kind of pullback in demand."
Already, in the U.S., gasoline demand has dropped for six straight weeks, according to MasterCard SpendingPulse. SpendingPulse said Americans bought 3 percent less gas last week than at the same time last year. The consumer research group tracks gasoline purchases at 140,000 service stations around the country.
The Energy Department's Energy Information Administration said Tuesday that gasoline prices should be higher when vacationers hit the highways this summer. The agency said in its monthly forecast that Americans will pay an average $3.86 per gallon during the summer driving season, which traditionally begins with Memorial Day weekend.
Pump prices are at the highest levels ever for this time of year. The national average for a gallon of regular rose 2 cents on Tuesday to $3.79, according to AAA, Wright Express and Oil Price Information Service. Illinois has joined California, Hawaii and Alaska with average prices above $4 per gallon.
In other Nymex trading for May contracts, heating oil lost 7.99 cents to settle at $3.1726 per gallon and gasoline futures gave up 1.14 cents to settle at $3.1641 per gallon. Natural gas fell a penny to settle at $4.098 per 1,000 cubic feet.
In London, Brent crude lost $2.99, or 2.4 percent, to settle at $120.43 per barrel on the ICE Futures exchange.