Brent crude fell on Wednesday after industry data showed U.S. crude oil stocks rose sharply last week and China said it would roll out more measures to fight inflation.
The American Petroleum Institute ( API ) said crude inventories rose by 3.2 million barrels for the week ended April 29, contrary to analysts' expectations for a gain of 2.0 million barrels.
The rise came even as crude imports fell by 1 million barrels per day last week to 8.94 million barrels per day (bpd), API data showed.
"We're seeing a bit of a sell-off in crude because of the U.S. inventories and if the EIA shows rising stockpiles as well that will put further pressure on prices," said Ben Le Brun, market analyst with CMC Markets in Sydney.
The U.S. Energy Information Administration's ( EIA ) report will be released on Wednesday at 1430 GMT.
ICE Brent crude for June LCOc1 shed 13 cents to $122.32 a barrel by 0436 GMT, after falling to as low as $121.72 earlier, near Monday's low of $121.67 and its third-straight session of losses. U.S. crude CLc1 lost 24 cents to $110.81.
China is expected to further tighten monetary policy to curb inflation, a move that could dampen demand in the world's biggest energy consumer.
The official China Securities Journal cited central bank vice governor Yi Gang as saying that China would keep mopping up excess cash in the economy by raising banks' required reserves.
In a separate story, the publication cited industry analysts as predicting that the central bank would raise required reserves again in May, its fifth time this year, to absorb some of the money created from hefty foreign inflows this year.
However, the impact on oil prices was likely to be muted, given the strength of Chinese demand, analysts said.
"We have already seen some moderation in economic activity in China, but the oil market has not seen any obvious slowdown despite previous tightening," said Barclays Capital commodities analyst Yinxi Yu.
"It is necessary to rein in the overheating economy. Chinese oil demand grew at 1 million barrels per day in Q1, so slowing down is a healthy move."
Oil prices dropped more than 2 percent on Tuesday, as an interest rate increase by India added to concerns about demand and gains in the dollar helped spark a technical sell-off.
The dollar index , which tracks the greenback against a basket of currencies, edged up 0.1 percent by 0428 GMT. The index has seesawed as it tries to recover from a three-year low.
A broader sell-off in commodities that dragged equities lower dampened investor appetite for risk-taking, after fear that huge price gains last month had made everything from oil to silver too costly.
"We saw a big pullback in silver and that flowed on to gold, and probably oil as well," said Le Brun.
From a technical perspective, Brent crude is forecast to fall further to $119.03 per barrel, while U.S. crude futures are headed to $108.00, said Reuters market analyst Wang Tao.
Analysts said a fear premium is in place due to ongoing tensions in the oil-producing regions of North Africa and the Middle East and the recent death of al Qaeda leader Osama bin Laden.
"There's a $20 premium built in the price due to the Middle East crisis and potential reprisals following bin Laden's death. That will provide a floor to prices for some time to come," said CMC's Le Brun.
Bin Laden was killed in a U.S. special forces assault on a Pakistani compound, then quickly buried at sea, in a dramatic end to the long manhunt for the al Qaeda leader who had been the guiding star of global terrorism.
World leaders hailed bin Laden's death but the euphoria was tempered by fears of retaliation and warnings of renewed vigilance against attacks.
In Libya, there was no let-up in the conflict as fighting between rebels and forces loyal to Muammar Gaddafi forced thousands of refugees to flee western Libya on foot to the Tunisian border and by boat to Europe, the United Nations said on Tuesday.