After jumping to a four-month high, domestic crude oil could be close to topping out for now and heading to what could be the lowest prices of the year.
West Texas Intermediate sold off Tuesday, ahead of government inventory data that are expected to show a buildup in supplies. The report is scheduled for 10:30 a.m. ET on Wednesday. WTI crude for April delivery settled at $101.64 per barrel, a decline of $1.18 a barrel.
"It's hard to call a top, but the second quarter ought to be pretty weak compared to the first quarter," said Edward Morse, Citigroup global head of commodities research. Citigroup expects prices to rise again in the second half and on Tuesday raised its forecast for oil prices in 2014 and 2015.
Citi bumped up its average 2014 forecast for WTI slightly, to $94 a barrel from $93, and raised the annual price for Brent, the international benchmark, to $103 from $98 for 2014.
For 2015, Citi raised WTI to $89 from $86, and Brent to $95 from $93 a barrel. But for the second quarter, it shaved its forecast for WTI by $1, to $88 a barrel, but raised Brent to $100 from $95.
"I think we're there" in terms of first-quarter highs, Morse said. "The second quarter is going to be the lowest. ... One reason is refineries are at the peak of maintenance, so demand is at its absolute lowest of the year, and the other is we're draining Cushing [Okla.]. ... Cushing is not going to be built up to where it was. Once it's drained, it's drained. The flow is going to the Gulf Coast, and it's going to pressure storage capacity along the Gulf Coast, and it will keep prices pretty low."
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Cushing is a physical storage hub for WTI futures, and oil stored there was basically landlocked before a recent pipeline opening.
Citigroup said the polar vortex was partly responsible for driving first-quarter oil prices back above $100. The extreme weather slowed production and drained inventories of distillates: eating oil and diesel.
"There's been two factors that drove the rally," said Gene McGillian, an analyst with Tradition Energy. "One is the opening of that pipeline. More oil heads to the Gulf Coast and because of export demand, it's going to raise the demand for WTI. It's really more distillates. My feeling is it's not going to be able to hold too long above there unless we have a supply disruption that changes the global picture."
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John Kilduff of Again Capital said the effect on WTI after the opening of the southern leg of the Keystone XL in January was that the U.S. crude rose closer to the international price.
"The glut is going to move to the Gulf Coast, and that should put downward pressure on the international price with the lessening of imports into the U.S.," he said.
U.S. imports have been falling as its production has picked up; the U.S. is now exporting about 2 million barrels a day in refined products.
Citi raised its forecast for oil prices, based on better demand data in recent months from developed countries, particularly the U.S., where fourth-quarter demand was up 1 million barrels a day. Recent weekly data show growth of 0.6 million barrels a day on a four-week average basis.
The Energy Information Administration data Wednesday are expected to show a supply increase of 1.5 million barrels during the week ended Feb. 21, according to by Platt's survey. API data released late Tuesday showed crude stocks rose to 0.82 million barrels and distillate stocks fell 0.7 million barrels a day, while gasoline fell 0.3 million barrels.
"If anything, I would expect a greater crude build tomorrow and a greater decline in the distillate category. That should be supportive of heating oil so it will support oil prices a bit," Kilduff said. "We're in the last throes of demand for heating fuels."
Citi also widened its forecast for the spread between WTI and Brent to $9 a barrel from $5. The spread Tuesday was about $7.50. It said the price of Brent, pressured by North Sea supply and Libya outages, should see prices back below $100 in the fourth quarter because of better global supplies and the seasonality of U.S. net crude imports.
U.S. imports have been dropping in the fourth quarter over the last several years.
"This is the mechanism by which the bearishness of the U.S. supply surge is transmitted to global markets, and we expect another repeat of this in 2014," Citi analysts wrote.
They said they are more bearish than others on Wall Street, but Goldman Sachs has a 12-month forecast of $90 for WTI and $100 for Brent.
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—By CNBC's Patti Domm. Follow her on Twitter