Oil prices fell nearly 4 percent on Tuesday as hedge fund speculators took profits from an all-time high above $60. US crude ended $2.34 lower at $58.20 a barrel, having set a record at $60.95 on Monday on the New York Mercantile Exchange. London Brent dropped $2.12 to $57.18 a barrel after setting a record at $59.59 on Monday on the International Petroleum Exchange.
Oil demand in the United States and Asia has held strong in the face of high fuel costs, encouraging traders to test the upper limits of what consumers will pay for energy.
But dealers are starting to wonder how high prices can go before denting demand, triggering an economic slowdown.
"One of the surprises of the high oil prices is that we haven't seen its penalty in economies. There will definitely be a cost but it will be delayed," Cambridge Energy Research Associates Chairman Daniel Yergin told Reuters in an interview Tuesday.
US Treasury Secretary John Snow said Tuesday there was no doubt inflated fuel costs were hurting the US economy, though not enough to halt or reverse recovery.
"Clearly, it's hurting," Snow said in an interview on CNBC television. "I don't see it derailing the strong recovery we're in ... but it does take a few tenths of a (percentage) point off GDP growth, that's for sure."
A buying surge by speculative funds has pushed prices up by almost a third since May amid growing fears of a global strain on production and refining capacity, especially in the fourth quarter, when demand for heating oil peaks.
"I think realisation has set in that this situation will not go away in a hurry. Apart from worries over Iran, there is the question of what Opec can do to bring down prices. The answer is - very little," said broker Rob Laughlin of Man Financial in London.
"The only thing that can halt oil's rise is evidence it is damaging the global economy. So far we have not seen that."
The Organisation of the Petroleum Exporting Countries, already pumping crude near the highest level in 25 years, could decide this week to raise output limits by another half a million barrels per day.
But the cartel has repeatedly said more crude may not help cool prices because of possible shortages of refined products. US crude stocks are near six-year highs.
Data due on Wednesday are expected to show US crude stocks fell last week, while forecasts call for data to show stocks of distillates, including heating oil and diesel, rose 1.6 million barrels, according to a Reuters survey.
Distillate demand typically peaks during the Northern Hemisphere winter, but strong summer demand for fuel this year has limited refiners' ability to lift stockpiles from below-average levels.
"The key demand-side driver remains US distillate demand, which continues to grow at a robust rate," Barclays Capital wrote. US diesel demand is running more than 6 percent above year-ago levels, official data showed last week.
Oil has also found support from the victory in Iran's presidential election by conservative Mahmoud Ahmadinejad, who has vowed to continue a nuclear program opposed by Washington.
Heightened geopolitical worries weigh on an oil market sensitive to potential outages since spare production capacity is limited to small unused volumes in Saudi Arabia.
The US Senate on Tuesday overwhelmingly passed a wide-ranging energy bill that offers $16 billion in tax breaks and incentives to boost domestic production.
But the bill still must be reconciled with an $8 billion energy package passed by the House of Representatives in April before a final version is sent to President George W. Bush.