Brent crude futures were down 8 cents to $125.35 a barrel by 1350 GMT, after settling up $2.55 on Monday at $125.43, then trading down over a dollar early in Tuesday's session.
U.S. crude futures fell 61 cents to $104.62, after rising $2.21 in the previous session.
Both crude contracts were also being pushed around as traders squared off positions ahead of the long Easter bank holiday weekend, but remained stubbornly range-bound.
"Essentially the market is continuing the pattern we saw last month, when it couldn't find a clear direction," said James Zhang, energy analyst at Standard Bank. "Few people are willing to aggressively short this market given the geopolitical risk."
"It's the same pattern we've seen for one and a half months," agreed Filip Petersson, commodity strategist at SEB. "Brent is stuck at between $122-$126 a barrel. We are still waiting for the Iran situation to become a bit clearer."
A combination of delays to North Sea loadings, quarterly fund allocations, ongoing uncertainty over Iran and U.S. manufacturing data helped fuel Monday's rally and is likely to keep prices elevated this week, traders and analysts said.
However, oil futures were put under pressure as the market digested more bearish U.S. oil and gasoline demand data from the Energy Information Administration.
Monday's stronger-than-expected U.S. manufacturing data from the Institute of Supply Management (ISM) and Sunday's Chinese PMI data had raised hopes of a pick up in demand for fuel.
But some scepticism set in following the softer demand data from the EIA. Although January's demand figures were revised slightly higher, they were still down 4.5 percent year on year, and are at the lowest January level since 2001.
"As prices have risen further since then, I don't expect demand to pick up more than the seasonal pattern, if at all," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "Talk about demand destruction will continue and cap prices."
Trading is thought likely to stay range-bound ahead of the long Easter bank holiday weekend as the market waits for key jobs data from the United States on Friday.
There are some fears that unless there is a strong positive number in the weekly jobs report, there could be a negative effect on the U.S. growth projections for the second quarter. This is contributing to the bearish sentiment, although traders noted that volumes remained thin.
"The market is taking a breather today, and is likely to be subdued for the rest of the week," said Victor Say, an analyst with Informa Global Markets in Singapore.
"No speculator will want to get caught on the wrong side with a long weekend coming up," agreed Michael Poulsen, an oil analyst at Global Risk Management. "Therefore some 'strange' price movements might occur, as speculators square their books or buy options to protect their current portfolio."
DISRUPTION THREAT
The threat of further supply disruptions in the North Sea is helping to keep a floor under Brent, after British oil major BP (BP.L) said it had shut the Valhall platform in the North Sea last week.
This is creating loading delays for one of the four crude oil streams used for the global Brent price benchmark, traders said.
"Supply outtake in the North Sea has now hit at least 160,000 barrels per day," said Poulsen. He suggested a year-on-year decline of 100,000 barrels per day would be a conservative estimate for 2012.
Traders and analysts also noted that oil futures sometimes benefit from an influx of investor flows at the start of a new quarter as asset allocators rotate into sectors that performed well in the previous quarter.
" The beginning of a new quarter is always a bit tricky - you have more investment money coming in and so the market can be a bit more volatile than normal," said Zhang.
The oil market is awaiting the weekly U.S. inventories figures from the American Petroleum Institute later today. A Reuters poll of analysts has forecast that crude oil stockpiles will rise by 2.1 million barrels.
Traders and investors will also be eyeing the minutes from the U.S Federal Reserve's last policy meeting due today, for any hints of a third round of quantitative easing, which will be supportive for oil prices.
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