Oil prices initially hit a new record overnight but later eased as top world producer Saudi Arabia appeared poised to boost production to the highest level in decades.
The dip into negative territory came after a brief surge earlier in the session to a record high near $US140 a barrel, triggered by weakness in the US dollar and an emergency shutdown of a North Sea oil platform.
Oil prices have surged about 40 per cent in wildly volatile trade since the start of the year and are up nearly seven-fold since 2002, driven by increased demand in China and other developing nations.
Andy Lebow,oil analyst at MF Global in New York said "After today's rally to near $140, people are reassessing the situation, noting that we may be getting more barrels from OPEC and mindful that the Saudis are hosting a summit of producers and consumers this weekend," US light, sweet crude for July delivery settled down 25 cents at $US134.61 a barrel, off a record high of $US139.89 set earlier in the session. London Brent crude fell 40 cents to $US134.71.
United Nations chief Ban Ki-moon said over the weekend that Saudi Arabia, under pressure from consumer nations calling for more supplies, was set to increase its oil output to 9.7 million barrels per day in July.
That would be a rise of 550,000 bpd, or over 6 per cent, since May, and would take Saudi output to its highest monthly rate since August 1981, according to US government data. US Energy Secretary Sam Bodman said overnight the US, the world's largest energy consumer already hard-hit by soaring petrol prices and a slumping housing market, would welcome the move. Saudi Arabia's plans emerged ahead of a meeting of oil producers and consumers on June 22 to find a solution to record oil prices that have caused widespread consumer protests.
Some analysts said, however, the move may not be enough to stem oil's rally. "The (Saudi) move does not seem to be enough to reverse the recent strength in prices, as it does little to repeal the longer-term expectations for tight demand-supply balances on the back of robust non-OECD demand and faltering non-OPEC supply," Barclays Capital said in a research note.
US oil refiners said overnight that they would not be interested in buying any additional Saudi oil unless the price was steeply discounted. The rapid price increase has also spurred demands from politicians to introduce curbs on so-called speculators in the oil futures markets. Investors have rushed into commodities this year as a hedge against the weak dollar and inflation.
Prices had leapt earlier in the day as the dollar fell versus the euro amid expectations the European Central Bank will hike interest rates to fight inflation.
Dealers said that the shutdown of Norwegian oil producer StatoilHydro's Osenberg A platform in the North Sea due to a fire had also encouraged some buying.