Brent crude fell below $115 on Tuesday on reports Libyan leader Muammar Gaddafi was looking for a way to step down and end the fighting that has slashed the nation's oil exports, while OPEC's assurances of supply also soothed investors.
As much as 1 million barrels a day of Libyan output has been disrupted by clashes between Gaddafi and rebels, or about two-thirds of normal production. That is equivalent to just above 1 percent of global daily consumption.
Two Arab newspapers and al Jazeera television said on Monday Gaddafi was looking for an agreement allowing him to step down, but there was no official confirmation of the reports.
ICE Brent crude for April shed 40 cents to $114.64 a barrel at 0522 GMT, after hitting $119.79 on February 24, the highest intra-day price since 2008.
I'm not surprised that Brent is running a little bit out of steam, said Matthew Lewis, an analyst at CMC Markets in Sydney.
In terms of the Libyan crisis, there is a lot of speculation that perhaps Gaddafi is looking to extradite himself. That may put an end to the crisis and the oil price would fall fairly rapidly.
Algerian Oil and Energy Minister Youcef Yousfi told Reuters the market remained well supplied despite the cut in Libyan exports and OPEC members had no plans to meet for now.
I think it is more psychological effect than physical deficit of oil in the market, he said. I don't think really there is a deficit.
U.S. crude closed above $105 on Monday, its highest since September 2008, buoyed by traders who sold Brent and bought West Texas Intermediate, unwinding a popular trade that had blown out to a record $17 a barrel last week.
On Tuesday, U.S. crude slid 37 cents from the 2-1/2-year peak to $105.07. The Brent/WTI spread has shrunk by more than $7 since last week's record, ending Monday at its narrowest since January.
There has been quite a large disparity between Brent and WTI, and that has come to the attention of traders as an opportunity to buy the WTI and sell the Brent on the expectation that the disparity will subside, Lewis of CMC said.
Concern has prevailed that violence and supply disruptions may spread to other countries in the region amid the Libyan turmoil.
But so far oil is flowing as usual from the world's biggest producers in the Mideast Gulf. Saudi Arabia, the world's top exporter and home to most of OPEC's spare capacity, has increased production to about 9 million barrels per day.
The massive spike that we've seen in the price of oil has literally been driven by the geopolitical concern. As soon as those short-term speculative motives are removed from the market, I expect to see a sharp drop in crude prices to below $100 and traders to focus on fundamentals again, Lewis said.
If crude oil prices stay high for an extended time, analysts said, Asian countries from China to India might not be able to sustain the growth pace that has driven the global economy.
Major U.S. oil companies have halted trade with Libya and big banks have started to pull back from funding such deals because of U.S. sanctions, in moves that will further disrupt oil flows from the torn country.
Major Libyan oil ports Ras Lanuf and Brega in the east of the country are closed as violence in the area has hampered operations at the terminals, shipping sources said on Monday.
But a coordinated release of strategic oil stocks by OECD economies is not yet needed because the oil supply disruption caused by an uprising in Libya remains limited on a global scale, the International Energy Agency (IEA) said on Monday.
The White House said on Monday the price of oil was one factor -- but not the only factor -- that would be used when determining whether the United States will tap its strategic oil reserve.
U.S. crude oil stockpiles could have risen by 300,000 barrels last week as imports likely rose, a preliminary Reuters poll ahead of weekly inventory reports showed on Monday.
The industry group American Petroleum Institute (API) will issue its weekly inventory report on Tuesday, at 2130 GMT, followed by government statistics from the U.S. Energy Information Administration on Wednesday, at 1530 GMT.