Oil prices fell to near $81 a barrel Tuesday, weighed down by sliding stock markets and the effects of a stronger U.S. dollar.
By early afternoon in Europe, benchmark oil for January delivery was down 55 cents to $81.19 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 24 cents to settle at $81.74 on Monday.
Nearly all European and Asian stock markets fell and the dollar gained Tuesday amid fears Ireland's debt crisis will spread to other financially weak European countries.
"We assume that market participants are now viewing Ireland as just being just the tip of the iceberg in terms of European debt problems," said MF Global analyst Edward Meir in New York.
Investors often look to stock markets as a gauge of overall investor sentiment while a stronger dollar makes crude more expensive for traders with other currencies.
"We have often said that the rise in crude oil prices in the past weeks and months was not based on an improvement in the fundamental data but was primarily driven by the weak U.S. dollar and investor interest," said a report from analysts at Commerzbank in Frankfurt. "Consequently, prices are now coming under pressure as these factors reverse."
With plenty of investors still betting on oil prices to rise "there is still substantial correction potential, making a temporary fall below the $80 mark quite possible," Commerzbank said.
Some analysts expect Chinese oil demand to jump to record highs by the end of the year despite recent measures to contain inflation. Improving crude demand in developed countries together with robust consumption in emerging economies should bolster prices, Goldman Sachs said.
"Underlying oil market fundamentals are much stronger than they were earlier in the year," Goldman said in a report. "We expect that these stronger fundamentals will continue to push prices higher in coming weeks."
Goldman expects oil prices to rise to $101 a barrel in 12 months.
Other analysts are less optimistic about a rise in oil demand in the U.S. and Europe. National Australia Bank expects crude prices to average in the $80s in every quarter through 2012.
"A dramatic decline in inventory is unlikely with demand conditions in most advanced economies expected to be sluggish for some time," NAB said in a report.
In other Nymex trading in December contracts, heating oil fell 1.27 cents to $2.2559 a gallon and gasoline dropped 2.45 cents to $2.1274 a gallon. Natural gas slid 2.6 cents $4.245 per 1,000 cubic feet.
In London, Brent crude dropped 57 cents to $83.39 a barrel on the ICE Futures exchange.
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Associated Press writer Alex Kennedy in Singapore contributed to this report.