Brent crude fell almost $2 on Monday towards $106 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 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.
Brent crude was down $1.99 to $106.63 at 0951 GMT. US crude was up 60 cents to $82.86 a barrel after dropping to as low as $81.13 earlier. The front-month September US 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 WTI and Brent."
Libya pumped around 1.6 million barrels per day (bpd), nearly 2 percent of global supply, before the war cut 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.
How quickly this can be achieved is a key question for the market. Carsten Fritsch, an analyst at Commerzbank in Frankfurt, said it could be about six months before output climbs 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 US 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."
The premium that has been in the Brent oil price since civil war broke out in Libya should now start to shrink, but Fritsch said this is unlikely to happen overnight.
"Given that the Brent price was below $100 before the uprising started in March, prices have some way to go, but it won't come down as quickly."
Olivier Jakob, oil analyst at Petromatrix, agreed saying he did not expect a flood of Libyan crude oil on a very prompt basis as when it restarts some of the oil production will probably go to local refineries.
The Libyan rebels gained control of the 120,000 bpd Zawiyah refinery last week. "It was believed to be the last operating refinery in the country and was providing Gaddafi forces with fuel, but is now supplying rebels," analysts at JBC Energy noted.
Tight supplies of Libya's light sweet crude in Europe helped fuel a widening of the spread between Brent and US 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.
The oil price remains at elevated levels despite the optimism around Libyan crude due to ongoing concerns about the health of the global economy.
Market participants are awaiting a speech from the US 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 is 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 the US 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.