Brent crude dropped for a third day, dipping toward $112 on Wednesday after reassurances from OPEC members of ample spare capacity eased anxiety about production losses from Libya, the world's 12th-largest oil exporter.

Libyan tanks and warplanes intensified their offensive against rebels on Tuesday aiming to recover lost territory, while world powers considered a no-fly zone over the country.

The premium added to Brent has been pared and it is possible that it will keep narrowing further because of some easing of Libya's tensions and thanks to the unwinding of positions on the WTI/Brent spread, said Ken Hasegawa, a commodity derivatives manager at Japan's Newedge brokerage.

Brent crude for April declined 86 cents to $112.20 a barrel at 0653 GMT, more than $7 below a 2- year high of almost $120 reached on February 24.

There is still a lot of uncertainty in the Middle East and North Africa by which the market will be supported, Hasegawa said, but added Brent prices could first fall toward $110.

The European benchmark has cut its premium to U.S. crude by more than half since reaching a record of more than $17 on March 1.

U.S. benchmark West Texas Intermediate was trading about $8 below Brent on Wednesday, down 77 cents at $104.25, having settled at a 2- year high above $105 on Monday.

The Organization of the Petroleum Exporting Countries is in talks about officially boosting crude supplies, Kuwait's oil minister said on Tuesday, but some in the group were reluctant to open the taps, saying world supply remains comfortable.

But fears of a supply squeeze have eased in the past few days on news that top oil exporter Saudi Arabia is pumping about 9 million barrels per day (bpd), exceeding its OPEC quota by almost 1 million bpd, roughly the same as the lost Libyan output.

That is in line with a U.S. Energy Information Administration (EIA) estimate released on Tuesday.


OPEC top producer Saudi Arabia said on Tuesday it has ample spare capacity to boost supplies to the market if needed.

The kingdom has 3.5 million bpd of spare capacity which could help compensate for any shortages, oil minister Ali al-Naimi said in remarks carried by Saudi state news agency SPA.

Top executives from some of the world's biggest energy companies, including French major Total SA and U.S.-based Hess Corp, on Tuesday said global oil supply is plentiful in spite of Libyan supply disruptions, and urged U.S. policymakers not to tap strategic oil stockpiles.

U.S. crude inventories climbed a larger-than-expected 3.8 million barrels in the week to March 4, industry group the American Petroleum Institute (API) said on Wednesday, ahead of EIA statistics due on Wednesday at 1530 GMT.

Total petroleum inventories for the Organization for Economic Cooperation and Development nations (OECD) are projected to fall to the equivalent of 55 days of consumption by the end of 2012 from 57 days in December 2010, near the middle of the previous five-year range, the EIA said in its short-term energy outlook published on Tuesday.

A glut at the Cushing, Oklahoma oil storage hub, the pricing point for WTI crude, has been depressing the price of the U.S. benchmark relative to Brent for months.

Disruptions to Libyan output last month and concern about unrest spreading across the Middle East triggered a blowout of Brent's premium, creating an attractive trading play.

However, talk of rising production by other OPEC members prompted traders to reverse those bets in the past week, unwinding Brent positions in favor of U.S. crude, which could be bought at much lower prices.

(Editing by Ed Lane)