January 7, 2014 / 5:21 AM / 4 years ago

UPDATE 2-Brent rebounds above $107 as Libya conflict escalates

4 Min Read

* Libyan navy opens fire as crude tanker approaches rebel-controlled port

* Freezing weather threatens to curtail U.S. oil production

* U.S. crude stocks seen rising last week (Adds detail, comment; updates prices)

By Jacob Gronholt-Pedersen

SINGAPORE, Jan 7 (Reuters) - Brent oil futures climbed above $107 a barrel on Tuesday after five consecutive sessions of losses, as investors weighed mixed signals from Libya and as cold weather across the central United States threatened production.

In an escalation of the conflict in Libya, the navy opened fire on Monday after an oil tanker approached to load crude illegally at a port controlled by rebels. The episode came after the country over the weekend restarted production at a major oilfield.

Brent crude for February delivery had gained 54 cents to $107.27 by 0659 GMT, after settling lower in the previous five sessions, partly on expectations of rising Libyan exports.

U.S. crude was 22 cents higher at $93.65 a barrel. The contract has also fallen in the past five sessions and settled 53 cents lower on Monday.

"I think the restart of production (at El Sharara) is priced in by now. Maybe it's even overshot to the downside," said Tony Nunan, oil risk manager at Mitsubishi Corp in Tokyo.

The restart of the 340,000-barrel-per-day (bpd) El Sharara field will more than double Libyan crude production, which had fallen to 250,000 bpd from 1.4 million bpd in July.

While expectations of more Libyan supply have helped push prices lower, an escalation of months-long civil unrest in the African country could put a floor under the market.

"This just shows that the trouble in the Middle East and North Africa is a chronic problem that's going to take years to solve," said Nunan.

"I think Brent will stay in triple digits as long as we have this instability in the region."

Deep Freeze

The recent wave of violence in Iraq and the possibility of increased tensions ahead of parliamentary elections in April have also sparked concern about supply from this key oil producing country.

U.S. Vice President Joe Biden spoke with Iraqi Prime Minister Nuri al-Maliki on Monday to express support for Iraq's fight against al Qaeda-linked militants.

"Iraq's energy infrastructure thus far has been largely shielded from the recent surge in violence, but the risks to the oil sector are rising," analysts at Barclays said in a note.

Oil prices were also supported by severe cold weather sweeping across the central United States that threatens to curtail some oil production as wells were stranded and drilling and fracking operations were interrupted.

Still, as of late Monday, major U.S. oil producers had only reported minor effects on their operations. Temperatures were forecast to swing back to normal levels in Texas and North Dakota by Wednesday.

Next week, trading will begin for crude oil loading in March, when a drop in demand can be expected as refiners in the United States and elsewhere enter spring maintenance.

"We have probably already passed the peak in winter crude purchases. I think the situation in Libya, Fed tapering and a stronger dollar doesn't bode well for crude prices," said Nunan.

U.S. commercial crude oil inventories likely rose 2.2 million barrels in the week ended Jan. 3 after a near-record five-week decline, a preliminary Reuters poll of analysts showed on Monday.

Over the previous five weeks, U.S. crude stocks fell by more than 30 million barrels - the biggest such decline since 1990 - as Gulf Coast refiners drew down stocks to minimize year-end taxes. Distillate stocks rose sharply last week. (Editing by Tom Hogue and Joseph Radford)

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