Oil prices extend losses after recent surge

Investors are looking ahead to the latest weekly snapshot of US energy inventories due later in the day.

Further ahead, all eyes will be on Friday's release of key jobs figures in the United States for a better indication of the health of the world's biggest economy and largest oil consumer.

On Wednesday, Brent North Sea crude for delivery in February sank 89 cents to $92.64 a barrel around midday in London.

New York's main contract, light sweet crude for February shed $1.14 dollars cents to $88.24.

The market had already slumped on Tuesday, hampered by the rebounding US dollar, which makes dollar-priced crude more expensive for buyers using weaker currencies. In turn, that tends to dent demand.

"Oil prices fell significantly ... as profit taking, following the recent upturn in prices, and a strengthening US dollar, weighed on the market," said Westhouse Securities analyst David Hart.

However, the price decline is forecast to be limited as demand is seen picking up due to growing optimism for the global economy, especially the US.

"The industry fundamentals supporting (oil demand) growth are not changing," said John Vautrain, vice president for Purvin and Gertz international energy consultants in Singapore.

"I continue to be optimistic about the oil prices for 2011," he said.

US manufacturing activity grew for the 17th straight month in December, bolstering confidence that the economic recovery there was gaining momentum while construction spending rose 0.4 per cent in November to its highest point in five months.

But the International Energy Agency warned that oil prices were in danger of threatening the fragile economic recovery in developed nations this year.

"Oil prices are entering a dangerous zone for the global economy," IEA chief economist Fatih Birol was cited as saying in the Financial Times newspaper on Wednesday.

"The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers."

Should crude prices again head towards $100, Birol's comments are likely to heap pressure on oil cartel OPEC, which last month decided to leave production quotas unchanged despite the rising cost of the commodity.

Oil had forged two-year highs on Monday due to confidence in increased global energy demand after the US economy showed more signs of recovery.