Oil stocks up as battle rages on in Libya

Confusion over the extent of the rebels' hold on the Libyan capital and a rally in stock markets drove oil prices higher Tuesday, a day after they fell in anticipation of the end of strongman Moammar Gadhafi's regime.

On Monday, Libyans celebrated the news that insurgents had reached Tripoli, but late in the day the appearance of Gadhafi's son and potential successor, whom the rebels had claimed to have captured, called into doubt rebel declarations of victory.

That confusion pushed benchmark oil for October delivery up $1.34 to $85.76 in the afternoon Paris time in electronic trading on the New York Mercantile Exchange.

In London, Brent crude was up 29 cents to $108.65 on the ICE Futures exchange.

Despite the initial jubilation, investors have also questioned how fast Libya's oil production could recover should the rebels take power. Fighting since February has cut the OPEC nation's crude output to 60,000 barrels a day from about 1.5 million, and the country's oil infrastructure has been damaged.

Capital Economics noted that with experts predicting Libya will take months, if not years, to ramp up production, traders may be putting hopes for the country on hold. They may instead be taking their cues from a rally in stock markets across Europe and Asia.

"Even if (Gadhafi) is dislodged soon, the markets may be worried about the scope for infighting between the unstable alliances of opposition forces that appear to have brought him down, and about the possibility of damage to Libya's oil infrastructure in the meantime," Capital Economics said in a report. "Nonetheless, we think that oil prices will fall further as events in Libya unfold."

Goldman Sachs said it was sticking by its forecast that Libya's oil production will average 250,000 barrels a day next year.

Others were more optimistic. Libyan crude output will likely return to pre-conflict levels in the first half of next year, said Richard Soultanian of NUS Consulting.

"With the new regime entirely dependent on oil revenues, the momentum to get facilities operational will be overwhelming," energy consultant Cameron Hanover said in a report. "In order for this new democracy to attract enough support, it will need to get oil flowing right away."

If Libyan production returns promptly, analysts expect the price of Brent to fall more than U.S. benchmark West Texas Intermediate because Libyan crude mostly supplied European markets.

"We expect Brent to drop back below $100 in a matter of weeks, if not days, and to $85 by 2012," Capital Economics said.

In other Nymex trading for October contracts, heating oil rose 2 cents to $2.93 per gallon and gasoline futures were even at $2.71 per gallon. Natural gas for September delivery added 1 cent to $3.90 per 1,000 cubic feet.

___

Alex Kennedy in Singapore contributed to this report.