Brent crude rose toward $109 on Tuesday as fighting in Libya continued and in anticipation of a fall in U.S. crude stockpiles.
Remnants of forces still loyal to Libyan leader Muammar Gaddafi fought rebels in Tripoli on Tuesday, extending a conflict that looked close to conclusion on Monday after rebels swept into Tripoli in tandem with an uprising within the city.
Continued fighting surprised some in the market, after Brent fell on Monday on hopes for a quick resolution and a speedy restart in exports from the OPEC member.
Brent crude rose 49 cents to $108.85 a barrel as of 12:22 a.m. EDT, while U.S. October crude was up 65 cents to $85.08 a barrel.
It could take months before oil can start to flow again from Libya, said John Vautrain, a director at energy consulting firm Purvin & Gertz.
I think there was a lot of euphoria on Monday. But the whole country is not completely pacified yet and we don't have an organized government. A lot is lacking.
A son of Muammar Gaddafi -- who rebels said they had captured -- appeared with cheering supporters in Tripoli, giving a boost to forces loyal to the veteran leader. The whereabouts of his father remained a mystery.
Libya would be able to restart some oil output in a few months, the country's former top oil official said on Monday. But it would take as long as 18 months to reach the pre-war level, Shokri Ghamen said.
Before the conflict, the country pumped around 1.6 million barrels per day (bpd), nearly two percent of global output.
Most of Libya's high quality crude went to European refiners. The prospect of an increase in supply of light sweet crude into Europe has led to the spread between Brent and U.S. crude narrowing.
Brent's premium to U.S. crude was below $24 a barrel after scaling a record high of $26.69 on Friday.
A fall in U.S. crude stockpiles could lead to a further contraction in the spread. U.S. crude inventories were forecast to have fallen due to lower imports, a preliminary Reuters poll showed on Monday ahead of weekly data due Wednesday.
Four of seven analysts polled expected crude stockpiles dropped in the week to August 19, with the average forecast showing a drawdown of 200,000 barrels.
The latest storm in the Atlantic hurricane season poses no threat to oil operations in the Gulf of Mexico, forecasters said. Irene strengthened into a Category 2 hurricane as it swept north of the Dominican Republic on Monday.
CONFIDENCE LEVEL IMPROVED
Investors' confidence may have improved after a senior U.S. Federal Reserve official said the Fed would intervene if the economy weakens and deflation appears.
But St. Louis Fed president James Bullard told Japan's Nikkei business daily that he expected stronger growth in the second half of 2011 and going into 2012.
All eyes are now on Fed Chairman Ben Bernanke, who will make a speech on Friday in Jackson Hole, Wyoming, at an annual gathering of policymakers and academics.
A lot of traders in commodities across the spectrum are looking at this Jackson Hole summit, speculating what is going to happen and what Bernanke's thoughts are, said Ben LeBrun, a Sydney-based markets analyst at CMC Markets.
Part of his job is to talk up the economy, so I think he is going to try and say something positive. It just depends what is being factored in terms of forward prices.
Recent market turmoil and signs of weaker U.S. growth have boosted expectations Bernanke may raise the prospect of more emergency stimulus for the world's largest economy and top oil importer.
At last year's meeting, Bernanke hinted at what eventually became a $600 billion quantitative easing bond-buying program, known as QE2. But some economists said Bernanke may hold off on aggressive easing plans this year.
Traders are also awaiting Chinese and European Purchasing Managers' Indices (PMI) due later on Tuesday.
Oil traders monitor symptoms of the health of the world's second-largest economy closely. Demand growth from China has driven oil markets for over a decade and is expected to provide the lion's share of the increase in global fuel consumption again in 2011.
HSBC's China Flash PMI showed the country's factory sector may have slowed slightly in August from July as new orders and new export orders eased on languid overseas demand.
China's trade outlook faces weak external demand and rising costs and the debt problems of advanced economies would bring challenges to the world's second-largest economy, Minister of Commerce Jiang Yaoping said on Tuesday.
(Editing by Simon Webb)
(This story was corrected in the lead to show Brent rises toward, not above, $109 and fixes spelling of Purvin & Gertz in fifth paragraph)