Brent crude dropped more than $2 on Monday to around $106 a barrel on the potential for a resumption of exports from OPEC-member Libya as a six-month civil war there appeared close to an end.
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, and tightening supply after Libyan exports stopped drove Brent toward a two-year high of $127.02 in April.
Brent crude traded down $2.36 a barrel at $106.26 at 0400 GMT, just above an intraday low of $106.15. US crude rose 2 cents to $82.28 a barrel. The front-month September US crude contract expires on Monday.
It may take years for output from the world's 17th-largest oil producer to fully recover, but rebels hope to resume oil output - Libya's main revenue earner. Analysts say output of as much as a million bpd could be feasible within months.
Rebels swept into the heart of Libya's capital Tripoli on Sunday as Muammar Gaddafi's forces collapsed. The fall of Tripoli came with a carefully orchestrated uprising launched on Saturday night to coincide with the advance of rebel troops on three fronts.
"You will see a relaxation in the supply of crude to the region as a result of what is happening in Libya," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney on how supplies coming back are hitting prices.
Tight supplies of Libya's light sweet crude in Europe helped fuel a widening of the spread between Brent and US WTI crude. The spread is already narrowing and could contract further with the prospect of a resumption in Libyan supplies, Barratt said.
"The important thing to note is that Brent and WTI (spreads) should be trading at $1-$2. It should never be $25, but this has been a result of Libya having lost so much supply of the light sweet crude which people rely on. The spreads between WTI and Brent should continue to unwind as Libya's light sweet crude is added back to the market. That would alleviate a lot of supply concerns on that spread."
Concern about the health of global markets kept investors skittish on Monday.
Market players 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 to talk shop.
Last year, Bernanke used the podium to suggest the Fed could help growth by buying long-term bonds, a prelude to a program enacted soon afterward that did just that.
No grand new plan is expected to be hatched at this year's meeting, but investors are concerned the US may again fall into recession and will be watching closely for any sign of a downgrade in Bernanke's economic outlook.
Asian stock markets turned positive on Monday, recovering a small portion of last week's steep losses, but gold shot to a new high as investors bought it to defend the value of capital amid the economic concern.
The Bank of Japan will consider easing monetary policy further, possibly at an emergency meeting before next month's rate review, if further rises in the yen push down Tokyo stock prices enough to hit business sentiment in the world's third largest economy, sources said.
Tokyo intervened unilaterally in the currency market and eased monetary policy on Aug. 4. But the steps have not stopped investors from seeking the yen as a safe haven against risk. Japan is the world's third-largest net importer of oil.