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Oil prices drop as Libyan rebels sweep into Tripoli

Brent crude down by more than a barrel, and European stock markets rise at prospect of return to large-scale oil production

Oil prices tumbled by more than a barrel as Libyan rebels tightened their grip on the country, raising hopes that the source of Africa’s biggest oil reserves could soon resume exports and give UK shares a much-needed boost.

As rebel commanders laid claim to 80% of the capital Tripoli – and Muammar Gaddafi’s 41-year rule came ever closer to ending – Brent crude fell by as much as .47 (£2.10), or 3.2%, to 5.15 a barrel before regaining some ground.

The prospect of Libya resuming large-scale crude production boosted the shares of oil companies, and saw the FTSE 100 enjoy a sought-after improvement. After losing £73bn, or 5.25% of its value last week, the blue-chip index rebounded on Monday, rising by 54.54 points to close at 5095.30.

Investors bet that the likely opportunities for business in Libya outweighed the decline in revenues implied by a falling oil price, sending BP and Royal Dutch Shell up by 2.2%. Petrofac rose by 4.0% after the oil and gas services company’s chief executive, Ayman Asfari, announced a surge of a quarter in interim sales and said he would send staff to Libya in the coming months to assess its potential. Lamprell, the oil rigs installer, increased by 3.8%, while Cairn Energy and Afren, the exploration firms which are both active in Africa, jumped by 4.0% and 4.3%, respectively.

Analysts are divided about how quickly Libya can regain its pre-uprising production level, which was around 1.6m barrels a day, or about 2% of global output.

Much would depend on how badly the fighting had damaged Libya’s oil infrastructure, they said, and how quickly a stable government with control over the energy industry could be established. At this stage, the answer to neither question was certain.

However, analysts agreed that recent production levels of about 50,000 barrels a day (for domestic consumption) would jump fairly quickly and significantly, reducing pressure on oil prices. Furthermore, the deteriorating outlook for the global economy – partly as a result of this year’s energy price rises – was likely to dent demand for oil, pulling its price down further.

Caroline Bain, of the Economist Intelligence Unit (EIU), said: “Oil prices can be expected to fall further if Gaddafi is removed from power as the prospect of resumed output from Libya will remove some of the political risk premium in the oil price.”

Bain said that while it could take two to three years before output in some of Libya’s more mature fields is restored, oil production should begin to pick up in a couple of months and reach about 1m barrels a day within a year.

The EIU expects oil to hover just about 0 a barrel in the fourth quarter of 2011 and to fall below 0 next year.

Oil prices have already fallen by about a fifth since they hit 7.02 a barrel in April, their highest level since Brent reached 7 in July 2008, as the Libyan uprising interrupted supplies. Since their springtime peak, prices have fallen as other oil producers stepped up production – to a record of 10m barrels a day in the case of Saudi Arabia – and the US and parts of Europe slipped closer to a double-dip recession bringing reduced demand.

However, analysts still believe that oil costs up to a barrel more than it would have without the Libyan uprising. Eliane Tanner, of Bank Sarasin & Cie, predicted that oil could fall as low as in the coming months.

As oil declined on Monday, gold reached yet another record high, breaching ,890 an ounce for the first time to trade at ,894.80 for a period. Investors have been scrambling towards gold as they seek for safe havens for their assets at a time when even US Treasuries have lost their rock-solid status. Platinum hit a three-year high of ,899.25 an ounce

Citigroup upped its forecast for gold, saying investor appetite for the precious metal had increased on fears of another US recession, fuelled by Standard & Poor’s downgrading of its credit rating, growing inflationary concerns and the eurozone’s debt crisis. The bank predicts that gold prices will average ,650 an ounce next year and ,500 in 2013, compared with previous forecasts of ,325 and ,225, respectively. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds