News the White House was "dusting off old plans" for a potential release of strategic oil stocks helped knock more than $1 per barrel off Brent, which hit a three-month high on Thursday.
The global benchmark has risen more than a third in less than two months on worries that conflict over Iran's disputed nuclear programme could lead to war, disrupting oil supplies from the Middle East.
But the oil price rally has come at a time when world economic growth is slowing, dampening demand for fuel, and oil supplies have been ample, helping restock inventories, and many investors feel the recent price rises have been overdone.
Brent crude fell $1.88 to a low of $113.39 a barrel before recovering to around $113.75 by 1245 GMT. The September Brent contract which expired on Thursday ended at the highest since May 2. US crude oil slipped 10 cents to $95.50, after settling up $1.27.
"The market moved a long way in quite a short time and we are now seeing some profit-taking," said Eugen Weinberg, global head of commodities research at Commerzbank in Frankfurt.
Weinberg said reports of a potential stocks release could prompt investors to sell long positions, hitting oil prices.
"Oil prices may well have reached their peak for the time being. That said, supply shortfalls in the North Sea and geopolitical tensions in the Middle East will preclude any sharp decrease in prices."
US officials will monitor market conditions over the coming weeks, watching whether gasoline prices fall after the Sept. 3 Labor Day holiday, in line with usual practice, a Washington source with knowledge of the situation told Reuters.
The United States has not yet held talks with international partners about a coordinated move. The source said Britain, France, Germany and other partner nations in the Paris-based International Energy Agency (IEA) had been receptive to a potential release a few months ago when conditions were similar.
Britain's energy ministry said on Friday it was ready to ask the IEA to take action to deal with high oil prices, but neither it nor its partners had made any decision to release stocks.
Japan and South Korea saw no need yet for a release from reserves, government sources said on Friday.
Oil market analyst Olivier Jakob at Swiss consultancy Petromatrix said talk of the release of strategic oil stocks would probably have only a very short-term market impact.
"It will not be a long lasting solution to wars on oil producing countries and liquidity injections," Jakob said.
ISRAEL VS IRAN
Oil prices were also dampened by easing concerns of a supply disruption from the Middle East after Israeli President Shimon Peres downplayed the prospect of a unilateral strike on Iran.
Peres said on Thursday he trusted U.S President Barack Obama's pledge to prevent Tehran from producing nuclear weapons.
Peres' comments appeared to challenge Prime Minister Benjamin Netanyahu and Defence Minister Ehud Barak, who have both raised the prospect of a unilateral Israeli strike.
Oil prices received some support from comments by German Chancellor Angela Merkel on Thursday, which helped push stock markets to multi-month highs on Friday and boosted the euro.
Merkel voiced support for ECB President Mario Draghi's euro crisis-fighting strategy and pressed her European partners to move swiftly towards a closer integration of fiscal policies, saying time was running short.
The euro was buoyant around $1.235 and hit a six-month high versus the yen.
Investors are now looking for indications on whether the US Federal Reserve will initiate more measures to stimulate growth, with data still suggesting that the world's biggest economy hasn't reached a stage of steady recovery.