Oil fell more than a dollar to less than $54 a barrel after Saudi Arabia's ambassador to the United States said current prices were good for consumers and producers and other OPEC members showed signs of hiking supplies for March.
Warm U.S. weather in early January launched a drop that has taken around 12% off U.S. oil prices since the start of the year, despite OPEC pledges to cut production.
But Saudi Arabia's outgoing ambassador to the United States said Monday OPEC's largest producer was satisfied with U.S. crude near $50 a barrel, adding that those levels are good for both consuming and producing nations.
"The present level of oil prices is adequate in our view," Prince Turki Al-Faisal said.
His comments came after news fellow OPEC members Nigeria and United Arab Emirates are ramping up supplies in March, despite an OPEC agreement to deepen cuts.
Nigeria's oil exports are expected to climb to a 14-month high of 2.21 million barrels per day in March from 1.8 million bpd the previous month.
Traders attributed the hike to a backlog in shipments following militant attacks last month.
Industry sources also said Abu Dhabi, the main producer in OPEC-member United Arab Emirates, was increasing supplies to Asia in March.
Abu Dhabi told Asian refiners they would receive their full term crude supplies after cutting shipments in February.
OPEC agreed in October to curb output by 1.2 million barrels per day (bpd), or 4 percent, from Nov. 1, and another 500,000 bpd from Feb. 1 after U.S. oil fell from record highs over $78 a barrel in July.
"There is the issue of OPEC credibility, with the report about Nigeria exports being up in March," said said Mike Fitzpatrick, vice president for energy at Fimat USA.
"As was the case last week, there is little reason to be long over $55 or short below $50."
Oil has tumbled 19% since Jan. 1 to a low of $49.90 on Jan. 18 because of a mild start to the northern winter and a shift in investor positions in commodities.
OPEC has said it will wait to assess the impact of existing supply cuts before calling for further reductions.
Recent colder weather in the U.S. Northeast, the world's biggest heating oil market, helped rally prices back over $55 last week. An influx of pension funds into passive commodities indices also helped support prices, Lehman Brothers said.
"Pension funds with 2007 commodity allocations finally entered the market in a big way, investing in indices including the Lehman Brothers Commodity Index (LBCI) and the Goldman
Sachs Commodity Index (GSCI) during the week," said a Lehman Brothers report.
Further support came from the U.S. government's announcement last week it would add 11 million barrels to the nation's strategic oil reserves.
"It should provide some support in the mid-$50s," said Evan Smith, fund manager at Texas-based U.S. Global Investors.
"I think the market will be rangebound at around $50-$60 for the first six months and $55-$65 for the second half."
Despite weather forecasts predicting higher demand, heating oil prices fell sharply. Gasoline and natural gas also sold off.
U.S. heating demand was expected to be about 9% above normal in this week, the National Weather Service forecast in its weekly report. Last week heating demand was about 1.4% above normal.
Demand for heating oil this week was expected to average 4.2% above normal, with heating demand for natural gas 9.2% above normal and heating demand for electricity 11.3% above normal, the report showed.
Heating demand in the U.S. Northeast will average above normal during the most of the next five days, private forecaster DTN Meteorlogix predicted today.
The six-to-10-day Meteorlogix forecast was for temperatures to average below normal.