Brent crude fell more than 1 percent on Monday as investors anticipate a resumption of oil exports from the OPEC-member Libya, where rebels moved to control most of Tripoli and an end to the six-month-old civil war seemed close.
Brent crude's forward curve flattened in the months through early next year and its premium to U.S. crude fell on hopes that a swift end to Libya's civil war will bring its oil exports back to the market.
Some Libyan output will be able to restart in a few months, but it will take as long as 18 months to reach the prewar level, Libya's former top oil official Shokri Ghanem told Reuters.
Muammar Gaddafi was a hunted man on Monday as remnants of his forces made a last-ditch stand in the capital of Tripoli.
A resolution of the conflict is modestly bearish for crude oil prices, but it is less likely that we will get a $10-$20 drop in price of crude, Jason Schenker, president at Prestige Economics LLC in Austin, Texas, said in a note.
U.S. crude prices pared gains as the front-month September contract approached expiration at the end of Monday's session. U.S. prices enjoyed an early boost from the dollar's weakness and a bounce by equities on Wall Street.
The dollar had been pressured on speculation that the Federal Reserve this week might indicate a need to take additional measures to support an ailing economy.
But the dollar index bounced, the S&P 500 stocks index briefly turned negative and, with any threat from Hurricane Irene to key U.S. oil infrastructure fading, U.S. oil prices pulled back.
Hurricane Irene, the first hurricane of 2011 Atlantic season, was on a track that could take it to Florida but would likely miss the concentrations of production and refineries to the west.
ICE Brent October crude fell $1.33 to $107.29 a barrel by 12:39 p.m., having recovered from a $105.15 intraday low.
U.S. expiring September crude rose 34 cents to $82.60 a barrel, having fallen back from $84.30. More actively traded October crude rose 40 cents to $82.81 a barrel.
Brent's premium to U.S. crude narrowed to $24.51 a barrel, after reaching a record $26.69 on Friday.
Brent crude trading volumes outpaced those for U.S. crude slightly, with both above 400,000 lots traded during the noon hour in New York.
Part of U.S. crude divergence from Brent is because traders are starting to bail out of their Brent/U.S. spread positions, said Dominick Chirichella of the Energy Management Institute.
Speculators raised slightly their long exposure to Brent in the week to August 16, data from the Intercontinental Exchange showed.
Selling by soft longs who increased exposure last week and profit taking by traders with long-held positions could put more short-term pressure on Brent, according to brokers.
Libya pumped around 1.6 million barrels per day (bpd), nearly 2 percent of global supply, before the war cut its output. Most of Libya's high-quality crude flowed to European refiners. After Libyan exports ceased, tighter supply drove Brent to a two-year high of $127.02 in April.
The limited resistance to rebel forces entering Tripoli may herald a swift resolution to the civil war, opening the potential for the resumption of Libyan oil exports by the end of 2011, JPMorgan said in a note to clients.
ECONOMIC CONCERNS REMAIN
Even as Libya got much of the attention, the recent stock market and a sputtering global economy had investors awaiting any indications of central bank intent on stimulus at a gathering of policymakers and other financial leaders in Wyoming later this week.
Federal Reserve Chairman Ben Bernanke will make a speech on Friday at a lodge in Wyoming's Jackson Hole, where policymakers and academics meet once a year.
(Additional reporting by Gene Ramos and Janet McGurty in New York, Claire Milhench in London and Seng Li Peng in Singapore; Editing by Andrea Evans)