Brent crude fell $4.10, or 5.2 percent, to $74.76 a barrel by 1:40 p.m. EDT (1740 GMT). US crude was down $3.00 at $71.11 a barrel. Brent was on track for the biggest single-day percentage decline since February 2016.
"Escalating trade tensions between the US and China has prompted risk aversion in today's trading session, which is evident in oil prices," said Abhishek Kumar, senior energy analyst at Interfax Energy in London.
The specter of tariffs on a further $200 billion of Chinese goods sent commodities lower, along with stock markets, as tension between the world's biggest economies intensified.
"Trade concerns have bitten today," said Michael McCarthy, chief markets strategist at CMC Markets. "If these tariffs are introduced, there will be an impact on global growth and demand." China is a top buyer of US crude, and has said it could tax US oil if trade tensions escalate.
Oil's price fall was aided by news that Tripoli-based National Oil Corp (NOC) had lifted a force majeure on four Libyan oil ports, saying production and exports from the terminals would "return to normal levels in the next few hours".
Libyan oil production fell to 527,000 barrels per day (bpd) from a high of 1.28 million bpd in February following the port closures, the NOC said on Monday. "Libyan relief changes the conversation about spare capacity," said John Kilduff, a partner at Again Capital Management. Concerns about a lack of spare capacity had led crude to rally.
Adding to the bearish mood were signs of a possible relaxation of US sanctions on Iranian crude exports. The prospect of sanctions on oil exports from Iran, the world's fifth-biggest oil producer, has helped push up oil prices in recent weeks, with both crude contracts trading near 3-1/2-year highs.
US Secretary of State Mike Pompeo said on Tuesday that Washington would consider requests from some countries to be exempt from sanctions due to go into effect in November to prevent Iran from exporting oil.
Washington had previously said countries must halt all imports of Iranian oil from Nov. 4 or face US financial restrictions, with no exemptions.
The market shrugged off bullish government data showing US crude stockpiles slumped by nearly 13 million barrels last week, the biggest slide in nearly two years..
Supply to the US market has also been squeezed by the loss of some Canadian oil production.
"In spite of the extraordinary draw in crude oil inventories, the market is under pressure after refiners produced a record amount of gasoline this week and in conjunction with a greater than expected build in distillate inventories," said Andrew Lipow, president at Lipow Oil Associates in Houston.