Oil prices dropped by more than $5 Thursday, adding to a decline of more than 10 percent from last week's record on worries over U.S. demand and easing political tensions between Iran and the West over its nuclear program.
Oil's slide marks the biggest three-day loss in the market in percentage terms since December 2004, a boon to world stock markets that have been hard-hit in recent months by mounting fears over inflation and the health of the banking sector.
U.S. light, sweet crude fell $5.31 to settle at $129.29 a barrel on the New York Mercantile Exchange, adding to more than $10 of losses over the previous two days that have brought prices further from Friday's all-time peak of $147.27 a barrel. London Brent crude also fell.
Traders said oil had been boosted by a combination of short-covering after its recent sharp drop and as a fresh cut to Nigerian output on Thursday underscored the risk to supplies.
Once the short trade ran out early in the afternoon, the price plunged to nearly a $4 loss for the day, Darin Newsom, senior analyst at DTN, an Omaha, Neb.-based commodities information provider, told CNBC.com.
"The market, despite how fast it moves up and down, is really doing exactly what it needs to be doing right now," Newsom said. "The level of volatility remains high and right now there is just an absence of buyers in this market."
Despite the losses, oil prices remain up about 30 percent this year, and up more than sixfold since 2002, driven in part by surging demand from developing economies in Asia and worries that world production growth won't be able to keep pace.
Dealers said the bulk of the downward push on crude oil in recent days has been concern that economic trouble in the United States was cutting deeply into demand for fuel in the world's biggest energy consumer.
"Consumers are being pinched between higher costs for necessities and lower real wages. The end result is falling demand almost across the board," said Peter Beutel, president of Cameron Hanover.
A government report Wednesday showed that U.S. oil product demand over the past four weeks running 2 percent below a year ago in a sign soaring pump prices were hitting consumption.
Dealers added that apparent easing tensions between the United States and Iran over its nuclear program have reduced some of the geopolitical risk premium in the oil market.
The United States said on Wednesday it was sending an envoy to Geneva to join nuclear talks with OPEC-member Iran for the first time, to underline to the Islamic Republic and others that Washington wanted a diplomatic solution to the impasse.
Iran's foreign minister said Thursday U.S. participation in the nuclear talks was "positive."
Thursday's losses were limited by fresh supply disruptions in Nigeria and Canada that together pulled nearly 200,000 barrels per day off the market -- the equivalent of a large oil field in the Gulf of Mexico.
An attack on an oil pipeline in Nigeria, the world's eighth-biggest oil exporter, led Italian oil company Eni to temporarily shut down production of 47,000 bpd in Nigeria because of loss of pressure in the lines.
In Canada, Suncor Energy said a leak at a pipeline carrying synthetic crude and diesel from its oil sands fields in Alberta forced a halt of about 140,000 bpd of shipments.