Oil falls towards $116 as supply risks reassessed

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

The West has been gearing up for an attack in response to last week's chemical weapons attack, although U.S. President Barack Obama faced new obstacles with British allies and U.S. 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 $116.00 by 1350 GMT. It jumped over 5 percent in the previous two sessions, posting its strongest two-day gain since January 2012.

October U.S. crude fell $1.50 to a low of $108.60 a barrel before rallying to around $109.40, following a near 4 percent 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 Middle East 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.

U.S. energy consultancy PIRA said on Thursday Saudi Arabia is set to make up for the shortfall, pumping 10.5 million bpd of crude on average throughout the third quarter, 1 million bpd above the second quarter and its highest quarterly level of production ever.

PIRA CEO Gary Ross described the Saudi output as a response to "the tightest physical balance on the world oil market I've seen for a long time".

Brent's premium over U.S. crude futures has risen to more than $6 a barrel, the widest since June, on expectations of increasing supply at the U.S. contract's delivery point in Cushing, Oklahoma. (Additional reporting by Florence Tan in Singapore; editing by Jason Neely and Keiron Henderson)



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