Brent crude fell back to $124.9 a barrel after jumping almost $6 to $128.40 in New York on Thursday. US light crude fell slightly to $107.9.
A number of factors had pushed prices to their highest level since July 2008, including tensions over Iran's nuclear plans and regional unrest.
Thursday's high beat the level seen during the Libyan civil war last year.
The problem facing the oil market at the moment is that events in a number of countries could have an impact on supply and demand, often causing traders to react more quickly to speculation and increasing volatility.
On Thursday, the trigger was a report in Iranian media that an explosion had occurred at a pipeline in Saudi Arabia.
The report came at a time when there has been a steady increase in friction between Iran on one side and the United States and its allies on the other.
The US has imposed fresh sanctions against Tehran targeting the country's oil exports, while the European Union has announced a ban on imports of Iranian oil.
For its part, Iran has threatened that it will close the Straits of Hormuz, a vital trade route for oil from the Gulf - including Saudi oil - if the West were to impose more sanctions.
Analysts said all these issues had created an uncertainty over oil supplies and the latest reports had only fanned those fears further.
"The sharp move up on the pipeline story points to the market nervousness on anything related to supply problems," said Gene McGillan of Tradition Energy.
Among the biggest buyers of Iranian oil are Asian economies such as China, Japan, India and South Korea.
The US has been trying to convince these nations to reduce their imports of Iranian oil, to put further pressure on Tehran.
Earlier this year, US Treasury Secretary Timothy Geithner visited China and Japan to drum up support for US sanctions.
But there have been concerns that if nations stop buying oil from Iran they will have to turn to other oil producers in order to meet their demand, pushing up prices and hurting global economic growth.
However, US authorities tried to allay those fears, saying that global oil producers were well placed to make up for any shortfall in Iranian oil.
"I think there is sufficient spare capacity," said Steven Chu, US Energy Secretary.
At the same time, some analysts said that change in global weather may also help in keeping oil prices in check.
"Oil prices have overshot in the short-term, and with warmer temperatures as we move from winter to spring, oil demand could start to fall, starting in March," said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.
"Brent could fall back below $120 (per barrel) if Iran doesn't flare up."