Benchmark Weste Texas Intermediate crude finished almost three per cent lower as a diplomatic push to end Israel's offensive in the Gaza Strip gained momentum.
Egypt's president predicted that airstrikes would end soon, and Israel's prime minister said his country would be a "willing partner" to a ceasefire with the Islamic militant group Hamas.
U.S. Secretary of State Hillary Rodham Clinton also headed to the Middle East to meet with leaders of the two sides and encourage a peace deal. The trip marked the most direct U.S. engagement in the conflict so far.
Benchmark crude fell $2.53, or 2.8 per cent, to finish at US$86.75 a barrel in New York. That wiped out a similar gain on Monday, when oil closed above US$89 a barrel for the first time in a month.
Brent crude, which is used to price international varieties of oil, fell $1.87, or 1.7 per cent, to end at US$109.83 a barrel in London.
Among other energy futures on the New York Mercantile Exchange, heating oil fell four cents to finish at US$3.04 a U.S. gallon (3.79 litres), wholesale gasoline fell four cents to end at US$2.71 a gallon and natural gas rose 11 cents, or three per cent, to finish at US$3.83 per 1,000 cubic feet.
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