Brent crude fell by more than a dollar on Monday to around $107 a barrel with traders and investors anticipating the resumption of oil exports from OPEC-member Libya as a six-month civil war there appeared close to an end.
Rebels swept into the heart of the capital Tripoli and crowds took to the streets to celebrate what they saw as the end of Muammar Gaddafi's four decades in power, with government tanks and snipers putting up only scattered, last-ditch resistance.
France and the UK have called on Gaddafi's supporters to stop fighting. Although oil prices fell on the rebels reaching Tripoli, oil traders are skeptical about how quickly Libyan output can be restored.
Brent crude was down $1.41 to $107.21 at 9:11 a.m. EDT. U.S. crude rose $1.39 to $83.65 a barrel as the dollar weakened against a basket of currencies. The front-month September U.S. crude contract expires on Monday.
Brent is taking more of a battering but that's only to be expected, said Christopher Bellew, a trader at Jefferies Bache. The divergence is just another graphic example of the dislocation between (U.S. crude) WTI and Brent.
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, but after Libyan exports ceased, tighter supply drove Brent to a two-year high of $127.02 in April.
Output has fallen to almost nothing during the conflict but technical staff from Italy's oil and gas major ENI have already arrived in Libya to look into restarting oil facilities.
Libya's rebel oil firm Arabian Gulf Oil Company (AGOCO) says it is technically ready to start oil output in its two eastern fields and can do so without the presence of foreign oil workers.
Analysts are skeptical as to how quickly exports will rise, however. Carsten Fritsch, an analyst at Commerzbank in Frankfurt, said it could be about six months before output climbed back to 1 million bpd or so, having examined what happened in Iraq in 2003.
Output was close to zero in the months after the U.S. invasion, he said. The big question is how much damage has been done to the oil facilities in Libya where the fighting has gone on much longer than in Iraq. There's a risk it may take a bit longer in Libya.
Caroline Bain at the Economist Intelligence Unit said it could be two to three years before output in some of the more mature fields is restored.
Tight supplies of Libya's light sweet crude in Europe helped fuel a widening of the spread between Brent and U.S. crude. The spread is already narrowing from a record $26.69 reached last week, and could contract further with the prospect of a resumption in Libyan supplies.
Part of the reason that U.S. crude has diverged 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.
Traders are awaiting a speech from the U.S. Federal Reserve Chairman Ben Bernanke on Friday at a lodge in Wyoming's Jackson Hole, where policymakers and academics meet once a year.
Fritsch said the possibility of a third round of quantitative easing was keeping oil buoyant. Talk of QE3 will prevent a steeper price drop for the moment. Prices will remain above $100 for the time being.
Bellew also pointed to U.S. sanctions against Syrian oil exports, announced last week. The EU is also drawing up plans for a possible oil embargo.
The next worry is that as fast as you see Libyan crude returning to the market we could see Syrian crude disappearing. That could be stopping it from falling so much, said Bellew.
(Additional reporting by Seng Li Peng in Singapore; editing by James Jukwey and Alison Birrane)