World oil prices slipped on Tuesday, extending the previous day's dramatic plunge after US President George W. Bush said Iraq could be disarmed peacefully.
London benchmark Brent crude fell 34 cents to $26.23 a barrel while US light crude was 44 cents down at $27.93.
Brent lost more than a dollar at the begining of the week when Bush's remarks seemed to diminish the threat of imminent war.
"I believe the free world, if we make our mind to do so, can disarm this man peacefully but if not, we have the will and the desire, as do other nations, to disarm Saddam," Bush said.
His statement was the strongest indication yet that Washington could possibly accept Saddam's remaining in power.
The UN's top weapons inspector, Hans Blix, played down the prospect of conflict on Tuesday when he told reporters in Moscow that Iraq could avoid war if it cooperated with monitors.
"I think that if the Iraqis help and cooperate to create confidence that there remain no weapons of mass destruction, then I think there will be no war," Blix said.
But while indications that Washington would give diplomacy one more chance in dealing with Iraq seem to have put war on the backburner for now, analysts have not ruled out the possibility of conflict in the oil-rich Middle East. They see the huge fall of Monday as a knee-jerk reaction.
"There is justification for the removal of some of the (war) 'premium'," GNI Research analyst Lawrence Eagles said. "But there seems little justification for its eradication."
Diplomats at the United Nations are reviewing the latest US draft resolution which drops explicit authorisation to use force against Iraq but provides cover to attack it after a serious warning if it obstructs weapons inspectors, according to excepts of the document obtained by Reuters.
"Oil prices will continue to be supported by fundamentals around the $25-a-barrel mark," said Steve Turner, energy analyst at Commerzbank in London. "So there is potential for a bit of a downside but that potential is limited."
"The threat of war hasn't disappeared, it has just been delayed."
Whatever the Iraq scenario, traders believe prices are unlikely to go into a freefall as oil inventories are still very low, expecially in the United States, the world's largest energy consumer.
Traders were this week awaiting industry data from the American Petroleum Institute (API) to see how things stand ahead of the energy-hungry winter season.
"While Iraq remains a factor, we are now in a phase when inventories are a bit more important," Commerzbank's Turner said. "And inventories going into winter are looking very low."
Stocks in the United States have been affected this year by a series of hurricanes in the Gulf of Mexico that shut energy production and blocked imports for a while, while high oil prices also to an extent discouraged inventory building.
While the API numbers are expected to show a small rise in US crude oil stocks, low refinery processing rates are expected to show a drop in heating oil inventories.
US refineries are experiencing difficulties in ramping up production after the recent shut-ins while poor refining economics are also proving a problem.
Analysts said that even if there was a recovery, output of refined products would take a few weeks to bounce back.