Light, sweet crude for September delivery fell $2.69 to settle at $124.08 a barrel on the New York Mercantile Exchange, a day after the contract soared more than $4 in the biggest one-day jump in two weeks. Prices have now fallen in four of the last seven sessions and are 14 percent off their all-time trading high above $147, reached July 11.

The drop in demand has been felt overseas as well. China has been consuming less energy since imposing restrictions on driving and closing some factories in an effort to reduce pollution ahead of next month's Beijing Olympics, said Cordier of Liberty Trading Group.

"Even when those factories reopen, I think we've crossed a threshold where the speculative money isn't coming back into the oil market for the rest of 2008," he said.