US crude futures settled down 37 cents at $43.10 a barrel, bringing them down more than $6 from a record high hit last week, when fears that world producers would not be able to keep pace with growing global demand hit a peak. Brent crude in London, meanwhile, dipped 35 cents to $40.33 a barrel.
Thursday's losses came after Iraq's most revered Shia authority, Ayatollah Ali al-Sistani, brokered a deal with rebel cleric Moqtada al-Sadr to end a three-week uprising by Sadrs militiamen in the holy city of Najaf, signalling a possible easing of tensions in the war-torn country.
Turmoil in Iraq, which is struggling to restore its once-robust crude exports, has underpinned oil price strength in recent months, adding to worries over a lack of spare production capacity from other Opec nations and flourishing demand growth in China and India.
Saboteurs in Iraq overnight Wednesday attacked a group of eight pipelines linking a main southern oilfield to a pumping station near the city of Basra, but shipping agents said the attacks had not affected southern Iraqi exports, recently restored to a full 2 million barrels a day.
"There's a mixture of trade and fund selling," said Prudential Bache broker Tony Machacek. "After such a substantial selloff yesterday, a lot of people think it has some way to go to the downside."
A US government report Wednesday showing hefty gasoline inventories at the tail-end of the summer vacation season in the worlds largest energy consumer also encouraged selling, after analysts earlier in the year had predicted tighter environmental regulations and high demand would cause a fuel crunch.
The US summer driving season traditionally ends on Labour Day weekend in early September, spelling a decline in gasoline demand and a brief reprieve for the oil markets ahead of the winter heating season.
While analysts say the market has been due for a correction for some time, they also say fundamental support is not far below the market, with global demand growth running at the fastest rate in 24 years.
A leading oil shipping analyst added Thursday that crude oil shipments from Opec were expected to have declined 380,000 barrels-per-day in August, countering expectations they would increase.
"The projections are probably not far from the truth in terms of production and exports and are mostly down to interruptions in Iraqi oil supplies," said Roy Mason of consultancy Oil Movements.
"If its confirmed by other agencies like the IEA (International Energy Agency) and other analysts then it runs counter to what we actually thought was going on in August, namely that exports were climbing," he said.
Opec has signalled that it planned to increase production in September to combat high oil prices, saying production would reach 30.5 million bpd in September from 29.6 million bpd in July.
Opec President Purnomo Yusgiantoro said Thursday the recent retreat in global oil prices was not moving fast enough, and the producers cartel wanted to see a swifter fall.
"We hope the price will continue to fall. We hope it can fall to around $30 per barrel. That is good enough," Purnomo said, referring to the Opec reference crude price, which dropped to $40.45 a barrel on Wednesday from Tuesdays $41.43.
The head of the International Energy Agency, Claude Mandil, said this week that while the economic impact of oils surge this summer so far has been modest, growth would soon suffer if prices were to stay at current levels for long.
"Its true to say that (so far) there is not a significant result in economic damage," he said. "We see it in the long term, if oil prices are sustained."
Opec will meet September 15 in Vienna to discuss a possible further increase in production quotas.