Crude fell more than $3 on Tuesday as Goldman Sachs warned again of a price reversal and key forecasters said expensive oil could erode demand.
Oil extended its retreat from 32-month peaks reached early on Monday, with U.S. crude's 5.8 percent drop from Friday the biggest two-day percentage loss since May 2010, when the Greek and wider euro zone debt crises pressured commodities.
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Oil led a broad commodities slump as Japan said its nuclear crisis was more severe than previously thought, rattling risk appetite and boosting U.S. Treasuries.
The industry group the American Petroleum Institute will release its oil data at 4:30 p.m. EDT.
Brent crude for May fell $3.06 to settle at $120.92 a barrel. The May Brent contract expires on Thursday.
U.S. May crude fell $3.67 to settle at $106.25.
"Fear of demand destruction is killing this market. There is a feeling that the recent rally lifted oil prices to unsustainable levels," said Phil Flynn, analyst at PFGBest Research in Chicago.
Sentiment was also diminished after two Saudi Arabia-based sources told Reuters that a lack of customer demand had forced the kingdom to throttle back production after a sharp increase in March to offset lost Libyan crude.
U.S. oil prices rallied above $113 on Monday, having jumped from an $83.85 low on February 15 in the wake of the ouster of Egypt's government and with unrest just beginning to spread in the region before engulfing Libya in a civil war.
In its second report in as many days, Goldman Sachs (GS.N) urged investors to book profits, and traders said many did.
Goldman expects Brent to fall toward $105 in coming months, the bank said in a note emailed to clients, after recommending on Monday that they close its trade on a basket of commodities that included U.S. crude.
Weekly oil inventory reports will offer a fresh snapshot of U.S. demand and stockpiles. Analysts surveyed on Tuesday expected crude stocks to have risen last week, with distillate stocks also up slightly and gasoline stocks lower.
High prices are beginning to dent oil demand growth, Western consuming nations' energy policy adviser the International Energy Agency said. Slowed economic growth could cause prices to correct, the IEA said.
OPEC kept its 2011 oil demand forecast steady in its monthly report, but said the group saw a risk that higher oil prices could dent demand for transport fuel.
A slightly higher demand growth forecast for 2011 came from the U.S. Energy Information Administration, but the EIA lowered its forecast of 2012 demand growth.
U.S. retail gasoline demand fell last week, with the four-week average down against the year-ago period in a reaction to sharp gains in pump prices, according to MasterCard Advisors' SpendingPulse weekly report.
Saudi Arabia pointing to slow demand as a factor in deciding to reverse its recent output hike was treated by investors as another sign of slack consumption.
Sources said Saudi Arabia had trimmed production by around 500,000 barrels per day to around 8.5 million bpd due to slow demand.
Demand in Japan remains in question as economic damage from last month's earthquake and tsunami is likely to be worse than first thought, the country's economics minister warned.
Threats to supply remained as Libya's conflict continued, as did opposition to current regimes in Yemen, Syria and other countries in the region.
France and Britain urged NATO to do more to stop Muammar Gaddafi's forces from bombarding civilians in Libya, even as Qatar said it had marketed 1.0 million barrels of crude on behalf of Libyan rebels.