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With Gadhafi out of power, oil prices should fall

Oil prices around the world should start falling if Libyan rebels succeed in toppling Moammar Gadhafi's regime, though the full effect won't be felt for months.
/ Source: msnbc.com news services

Oil prices around the world should start falling if Libyan rebels succeed in toppling Moammar Gadhafi's regime, though the full effect won't be felt for months.

Crude prices fell on Monday on hopes that Libya would soon resume oil output. A grim outlook for the economy also helped depress crude prices and sent gold soaring to a new record high of $1,900 an ounce.

Rebels overran a large part of Tripoli after a quick advance as defense of Moammar Gadhafi's regime collapsed. Gadhafi's whereabouts were unknown while two of his sons were captured by rebels.

Benchmark Brent crude prices wilted as Italy's foreign minister said oil company ENI has already sent staff back to the country to look into the restart of production.

"Brent is taking more of a battering but that's only to be expected," said Christopher Bellew, a trader at Jefferies Bache.

Libya pumped around 1.6 million barrels per day (bpd), nearly 2 percent of global supply, before the war cut output. Most of Libya's high-quality crude flowed to European refiners, but after Libyan exports ceased, tighter supply drove Brent to a two-year high of $127.02 in April. Output has fallen to almost nothing during the conflict.

Brent crude, which is used to price many international oil varieties, dropped $1.47 to $107.15 per barrel on hopes of fewer supply constraints. Benchmark U.S. crude rose, however, by $1.58 to $83.99 in morning trading as traders used a financial strategy to take profits.

On Sunday night, rebel forces pushed into Tripoli without meeting much resistance, hours after they overran a major military base that defended the capital. Opposition fighters captured Gadhafi's son and one-time heir apparent, Seif al-Islam.

Independent analyst Andrew Lipow said oil markets will likely respond Monday by sending prices lower in "a sign of relief that conflict has come to the end." But Lipow said it will take time for the market to erase the hefty price increase that resulted from the suspension of Libyan oil exports since the rebellion began in February.

When fighting broke out, oil was trading at around $84 a barrel. It quickly spiked above $93 and kept rising to a high above $110 at the end of April. Demand from emerging markets including China was also a factor in the rise. Oil has fallen recently along with stocks because of concerns about the global economy.

Independent analyst Jim Ritterbusch said that even if rebels manage to push Gadhafi out soon, the near-term effects on oil prices will be limited.

"Psychologically anyway, it's going to force some additional selling," Ritterbusch said. "But selling may not be pronounced because there's still a lot of question marks remaining" on how long it would take for production to resume.

Michael Lynch, president of Strategic Energy & Economic Research, said that once Gadhafi is pushed out, Libya's new government could take the path of the Iraqis after the fall of Saddam Hussein and spend years fighting over every detail. Or it could follow Kuwait's example and quickly decide to bring in an outside company to get production restarted right away.

He added that there's always a chance that the process could come to a halt if one of the rebel generals tries to seize power, or if different factions get caught up debating the country's new constitution and put off making decisions about oil production.

"They do have a good cadre of educated people, but they don't have a long record of competent self-government," Lynch said. "It would not be a bad bet to think there might be a chaotic period for a few months till they get organized."