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 The Nymex crude contract fell $3.15 to settle at $90.38 a barrel Tuesday, partly due to a research report from influential trading house Goldman Sachs advising clients to sell oil futures to lock in profits.
"The general expectation is that the Federal Reserve will cut the interest rate, and there may have been some precautionary profit taking ahead of that," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney.
Most investors expect the U.S. Federal Reserve to deliver a quarter-point cut at the end of its two-day meeting later Wednesday. The Fed made a half-point reduction in September.
The market has already factored in a quarter-point cut in the benchmark U.S. interest rate, but a half-point cut could spark a new rally, Koichi Murakami, a broker at Daiichi Shohin, told Dow Jones Newswires.
A larger-than-expected cut would further weaken a greenback already at multiple-decade lows against major currencies. Oil futures have been driven to record levels the past week partly because they offer a hedge against a weak dollar.
A weak dollar also makes oil futures seem inexpensive to traders dealing in other currencies.
"Some traders will continue profit-taking sales, but it is difficult to take large positions ahead of the two important indicators," Murakami said.
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 Besides waiting for the U.S. Fed decision, traders are also watching for a weekly U.S. petroleum inventory report expected to show crude supplies rose last week.
Oil futures' most recent price rally started a week ago, when the EIA reported a large, unexpected decline in crude inventories.
Analysts surveyed by Dow Jones Newswires, on average, predict that oil inventories rose
100,000 barrels during the week ended Oct. 26, though their estimates vary widely.
The analysts said, on average, refinery use grew 0.5 percentage point to 87.6 percent of capacity; gasoline inventories rose 400,000 barrels; and distillates, which include heating oil and diesel fuel, fell 1 million barrels.
Heating oil futures fell 2.46 cents to $2.4 a gallon (3.8 liters) while gasoline prices declined 1.71 cents to $2.24 a gallon. Natural gas futures rose 1.4 cents to $8.035 per 1,000 cubic feet.
In London, December Brent crude fell $1.14 to $86.30 a barrel on the ICE futures exchange.
[Associated Press;
By GILLIAN WONG]
Copyright 2007 The Associated Press. All rights reserved. This
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