Oil falls below $116 as supply risks reassessed

Analysts expect US crude futures to weaken against Brent, keeping the price spread at more than $5 a barrel, as domestic production continues to rise from shale resources

Brent crude oil dropped below $116 a barrel on Thursday as the possibility of a delay in a US-led military strike on Syria helped calm concerns over West Asia oil supplies.

The West has been gearing up for an attack in response to last week's chemical weapons attack, although US President Barack Obama faced new obstacles with British allies and US lawmakers that could delay any imminent action.

Brent crude for October delivery hit a low of $114.94 a barrel, down $1.67, before recovering to trade around $115.75 by 1110 GMT. It jumped over 5 per cent in the previous two sessions, posting its strongest two-day gain since January 2012.

October US crude fell $1.50 to a low of $108.60 a barrel before rallying to around $109.30, following a near 4 per cent gain over the past two days.

"The market is reassessing the supply implications of the conflict in Syria," said Eugen Weinberg, global head of commodities at Germany's Commerzbank.

"Our view is military action will not destabilise the whole Middle East, which means the risk premium is being overstated. If the conflict is contained in Syria, prices are too high."

Obama said on Wednesday that a "tailored, limited" strike, not a protracted engagement like the unpopular Iraq war, could be enough to send a strong message that the use of chemical weapons cannot be tolerated.

Oil has jumped this week to multi-month highs on fears that the potential strike on Syria could spread unrest to major oil producers in the West Asia and disrupt supply.

Even without disruption to supplies from key oil producers such as Saudi Arabia and Iraq, the oil market already has a host of supply issues to worry about.

Libya's crude output has fallen to around 250,000 barrels per day (bpd) from pre-war levels of 1.6 million bpd as workers' strikes crippled exports, Prime Minister Ali Zeidan said on Wednesday.

Iraqi oil production has fallen by around 500,000 bpd due to maintenance and problems with local pipelines, while output has also been restricted from the North Sea, the Gulf of Mexico, the Black Sea and Nigeria.

Analysts say between 2 million and 3 million bpd of oil has been removed over the last few months, tightening a market that otherwise would have been well supplied.

Brent's premium over US crude futures CL-LCO1=R has risen to more than $6 a barrel, the widest since June, on expectations of increasing supply at the US contract's delivery point in Cushing, Oklahoma.

US crude stockpiles rose almost 3 million barrels to 362 million barrels last week, data from the US Energy Information Administration showed, far exceeding a forecast of a 0.2 million barrel build in a Reuters poll.

Analysts expect U.S. crude futures to weaken against Brent, keeping the price spread at more than $5 a barrel, as domestic production continues to rise from shale resources.