Oil prices fell on Tuesday, with North Sea Brent crude dropping more than $2 a barrel briefly after Kuwait's oil minister said OPEC was considering boosting production for the first time in more than two years.
The Organization of the Petroleum Exporting Countries has yet to change its production policy officially, even though it has been boosting supply informally for months and Saudi Arabia has offered to help make up for the loss of around two thirds of Libya's output.
An official increase in OPEC output would signal the group's determination to put a cap on prices after uprisings and unrest across North Africa and the Middle East sent oil to its highest in more than two and a half years.
Fighting in Libya has idled around 1 million barrels per day (bpd) and consumers have been looking for a response from OPEC.
Brent crude dropped to below $113 per barrel before creeping back to $113.75, $1.29 lower on the day, by 1425 GMT. U.S. light crude futures were 5 cents lower at $105.39.
On February 24, Brent hit $119.79, its highest since 2008, when it reached an all-time high of $147.50.
We are in consultations about a potential output increase, Kuwait's Sheikh Ahmad al-Abdullah al-Sabah told reporters, but added the group had taken no decision yet to produce more than its existing output targets.
Iran, which holds OPEC's rotating presidency, said there was no need for a boost in production as consumer worries over supply were mostly psychological.
There is no shortage in the market. There is no need for further OPEC supply, Iran's OPEC governor Mohammad Ali Khatibi told Reuters in a telephone interview on Tuesday, pointing to a difference of opinion among members.
Saudi Arabia, the world's largest oil exporter and home to most of OPEC's spare capacity, has boosted oil production to fill the gap left by Libyan exports and is now pumping about 9 million bpd, almost 1 million bpd above its OPEC quota.
Brent's premium over U.S. crude, known as West Texas Intermediate or WTI, shrank below $9 on Tuesday, down from more than $17 at its peak last week.
Analysts say Brent and other seaborne light sweet crudes have responded better to rising output from other OPEC members to compensate for lost Libyan production. U.S. crude has also firmed as crude and product imports have been drawn away from the United States due to stronger markets in Europe and Asia.
BATTLE FOR LIBYA
Libyan oil output and exports have dwindled over the last few days and the key Libyan oil ports of Ras Lanuf and Brega in the east of the country are closed due to violence in the area.
Witnesses reported at least four airstrikes by Muammar Gaddafi's forces on Ras Lanuf on Tuesday, contributing to concerns the country's oil infrastructure could suffer long-term damage in the conflict.
The market is now waiting for the next piece of news to unfold, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, who said $2 moves were not surprising in such a volatile market.
A turn for the worse for the market would be oil infrastructure being hit as a result of the fighting. The demise of the current regime or a more forceful statement from OPEC followed by an increase in production would be significant too.
The industry group American Petroleum Institute (API) will issue its weekly inventory report at 2130 GMT on Tuesday, followed by government statistics from the U.S. Energy Information Administration on Wednesday, at 1530 GMT.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by William Hardy)