Continued fears of supply disruptions in Iran were offset by news that Libyan oil production would return to levels last seen before the civil war in February, and data the day before which showed Saudi Arabia boosted oil exports in January.
Adding to worries about potential demand destruction, China said on Tuesday it was raising retail gasoline and diesel prices by between 6 and 7%, the biggest increase in nearly three-years.
"The move might sap demand growth. Higher prices tend to discourage wasteful consumption," said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.
However, any impact is expected to be muted as China's economy continues to grow robustly, albeit at a slower pace.
Brent crude fell 64 cents to USD 125.07 a barrel by 0630 GMT, after settling 10 cents lower in the previous session.
US crude was down 50 cents at USD 107.59. The benchmark had gained more than USD 1 on Monday after Valero announced it would shut down its 235,000 barrel per day (bpd) Aruba refinery, further tightening regional supplies ahead of the US summer driving season.
The April contract expires at the end of Tuesday's session. US May crude was trading at USD 108.00, down 56 cents.
SUPPLY GROWS
Exports from Saudi Arabia rose by 143,000 barrels per day (bpd) in January as the world's leading crude seller increased supplies to the United States while it has pledged to work "individually" and with other Gulf countries to return oil prices to "fair" levels.
Libya is also ramping up production as it plans to export almost 1.4 million bpd of crude oil in April, exceeding deliveries in February 2011 before the uprising that ousted Muammar Gaddafi.
This boost in global supply has eased concerns about the standoff between the West and Iran over Tehran's nuclear programme that has lifted oil prices this year and kept oil markets on edge.
Iran has agreed to a new round of talks with the West, but Western sanctions aimed at curtailing Tehran's nuclear ambitions have hit oil exports.
A potential loss of Iranian barrels has help underpin a 17% surge in crude prices this year, and could take the market higher when sanctions are enforced on July 1.
Societe Generale raised its price forecasts for Brent crude oil and US West Texas Intermediate crude oil for 2012 and 2013, citing supply side issues such as tight crude stocks, low OPEC spare capacity and strong non-OPEC supply disruption.
"In addition, both actual and potential supply disruptions from Iran will be an important factor for the markets," analysts at Socgen said in a note on Monday.
The bank raised its 2012 Brent price forecast to USD 127.37 a barrel from USD 110. It also upped its WTI price to USD 117.15 per barrel, from USD 103 earlier.
CHINA DEMAND
The hike in China's fuel prices, its second in just over five weeks, was anticipated due to a spike in global crude prices, but the increase was bigger than expected, analysts said.
However, most said they did not expect the move would choke oil demand.
China last raised fuel prices in February, lifting gasoline and diesel rates 3 to 4% to record highs.
The government, worried about inflation, has often postponed raising prices in the past two years, meaning refiners often run at a loss as they are unable to pass on any increases in crude oil costs to consumers.
US CRUDE STOCKS
US commercial crude stockpiles are forecast to have climbed last week on higher imports and lower refinery activity, in line with seasonal patterns, a preliminary Reuters poll of analysts showed on Monday.
The survey of five analysts before weekly industry and government inventory reports for the week to March 16 produced an average forecast of a 2.4-million-barrel increase.
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