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 Light, sweet crude for December delivery on the New York Mercantile Exchange slipped 4 cents to $85.98 a barrel in electronic trading by midday in Europe. The contract had fallen 93 cents on Monday.
Turkish military helicopters airlifted commando units to the Iraqi border overnight after an ambush by rebel Kurds left 12 soldiers dead and eight missing.
Turkey's Foreign Minister Ali Babacan flew to Iraq Tuesday to pressure Baghdad to crack down on the Iraq-based rebels before Turkey sends troops across the rugged frontier. Babacan said Monday that Turkey will pursue diplomacy before sending in its military.
Crude traders worry a Turkish incursion into Iraq would cut oil supplies from northern Iraq.
Oil prices have fallen in the past two sessions as the U.S. stock market's sharp downturn Friday reignited concerns that the U.S. economy might be slowing, cutting demand for oil and petroleum products.
Market participants are now shifting their attention to the release of a U.S. petroleum supply snapshot by the U.S. Energy Department on Wednesday. U.S. crude inventories are estimated to have risen last week by a modest 300,000 barrels, according to the average of predictions from nine analysts polled by Dow Jones Newswires.
Gasoline stock levels, still near record lows, probably rose 1.1 million barrels, and distillate stockpiles, comprising heating oil and diesel, 200,000 barrels, the survey showed.
Vienna's PVM Oil Associates noted other factors keeping prices high, including its expectation that U.S. demand for oil would increase by a healthy 1.2 percent in 2007 and 0.8 percent in 2008.
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 "In addition, world oil demand in 2007 and 2008 is forecast to rise by 1.5 and 1.9 percent respectively," it said
Still, debate is growing about whether last week's foray by crude above $90 marked the peak of the bull market. Analysts are similarly split over whether the underlying supply and demand fundamentals justify such high prices.
Predictions about the future of oil prices range from $60 to $120, depending on whether the analyst believes oil supplies will tighten amid growing demand in the fourth quarter.
Many analysts think prices have risen sharply in recent weeks due only to speculative investing. Data released on Friday shows speculative buying of oil contracts increased last week. Others argue fundamentals clearly support higher prices.
December Brent crude was up 3 cents, fetching $83.30 a barrel on the ICE futures exchange in London.
Heating oil futures were essentially flat at $2.3094 a gallon while gasoline prices dropped 0.35 cents to $2.12 a gallon.
Natural gas was steady at $6.897 per 1,000 cubic feet. Natural gas prices are under pressure from unseasonably warm temperatures in the north and Midwest of the U.S. and a forecast that this winter will be warmer than normal.
[Associated Press; by George Jahn]
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