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Oil prices steady below $128 a barrel after dropping more than $3 in previous session.

Tuesday's drop was oil's biggest one-day decline since March 31. The front-month contract is now more than $6 off its all-time peak of $135.09 a barrel reached last Thursday.

The decline came in the face of supply problems in Mexico and Nigeria that could have driven oil prices higher. That's an indication that demand concerns are weighing on the market and giving investors reason to pull back from the record high oil prices, analysts said.

"If present trends continue, we could be heading for the first annual drop in gasoline consumption in some 17 years," said Edward Meir, an analyst at MF Global UK Ltd., in a research note.

Oil prices were also pressured Tuesday by the dollar, which gained ground against the euro. Investors who buy commodities such as oil as a hedge against inflation when the dollar falls tend to sell when the greenback strengthens. Also, a rising dollar makes oil more expensive to overseas investors.

Investors shrugged off a number of events that could have sent oil prices higher, including news that crude oil production in Mexico fell 13 percent in April compared to the previous year, the temporary shutdown of a North Sea oil platform and the latest in a spate of oil-pipeline bombings in Nigeria.

Investors also ignored continued strength in heating oil futures, which have over the last month helped send crude oil smashing through a string of new record highs. Distillate supplies worldwide are seen as strained due to strong demand for diesel from Europe and Asia.

SOURCE:http://hosted.ap.org/dynamic/stories...MPLATE=DEFAULT