Oil prices edged lower on Tuesday after rising earlier in the day and analysts said prices were set to sustain a rally driven by strong demand in the United States, the world`s biggest consumer of oil and its products.

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Brent crude was down 5 cents at $85.94 a barrel by 0631 GMT, after gaining 0.5% on Monday. U.S. oil dropped 12 cents to $83.64 a barrel, having finished unchanged the previous session after testing new highs.

 

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While China`s red-hot power and coal markets have cooled somewhat after government intervention, energy prices remain elevated worldwide as temperatures fall with the onset of the northern winter.

"Forecasts for a colder November have energy traders bracing for a very tight market that will be met (with) unprecedented demand this winter," OANDA senior market analysts Edward Moya said in a note.

"This oil market will remain tight and that should mean a headline or two away from $90 oil," he said.

Goldman Sachs said Brent was likely to push above its year-end forecast of $90 a barrel. The bank estimated switching to oil from gas may add 1 million barrels per day (bpd) to oil demand.

Gasoline and distillate consumption is back in line with five-year averages in the United States after more than a year of depressed demand.

The market will be closely watching U.S. inventory levels this week. Crude oil stockpiles are forecast to have risen by 1.7 million barrels last week, according to a Reuters poll of analysts. Gasoline and distillate inventories were expected to fall, however.

"Limited global oil supplies and signs of increasing demand would continue to see elevated crude oil prices," said Avtar Sandu, senior manager, commodities at Phillip Futures in Singapore.

Sandu said traders were also awaiting clarity on the outcome of talks between Iran and Western powers after the United States said efforts were at "crucial phase" to revive a 2015 nuclear agreement with Iran, which could open the way for exports of its crude.