London - Oil retreated from highs on Friday as a senior industry official said top exporter Saudi Arabia had increased output to make up for any shortages as a result of a disruption to oil supplies from Libya.
ICE Brent crude futures was up 75 cents at $112.11 a barrel by 1235 GMT, retreating from $113.91 earlier in the day. It touched a two-and-half year high of $119.79 on Thursday.
US crude futures
Credit Agricole CIB global analyst Christophe Barret said the initial panic in the oil market was receding.
"Yesterday we had a very large shock, it was the first time we had real disruption to supply and real disruption to exports. But this can be absorbed by regular market functioning which is what is happening right now," Barret said.
"At the end of the chain you will have OPEC increasing production but it's not economical for Italy to ask Saudi Arabia directly for more oil."
Saudi Arabia had quietly increased its production to more than 9 million barrels per day (bpd), an increase of more than 700 000 bpd, a senior industry source familiar with Saudi production told Reuters on Friday.
"We have started producing over 9 million barrels per day. We have a lot of production capacity," the source said.
Reuters estimated Saudi output at 8.3 million bpd in January. OPEC's leading producer has come under pressure to lift output to stem a spike in oil prices now at $112 a barrel.
In terms of the volume, the increase could compensate at least a part of the loss of Libya's oil supply due to the civil unrest in the North African country.
The estimates of shut-in volume varies. The International Energy Agency said Libyan oil output to have been cut by 500 000 to 750 000 bpd due to the unrest, while Italian oil company ENI said as much as 1.2 million bpd may be down.
Differnt oil grades
Libya is also an OPEC producer with normal output 1.6 million barrels per day. Saudi Arabia is the only oil producer with significant spare capacity to meet global supply outage volume such as the reduction in the flow from Libya.
Some industry officials and physical oil traders, however, said the difference in qualities between Saudi and Libyan oils may make it difficult to fill in the supply gap immediately.
Italian refiner Saras would look to alternative crude from other countries.
"Saudi Arabia is not an alternative to Libya since its crude is not sweet," Saras General Manager Dario Scaffardi told Reuters on Friday.
Sweet crude is oil which has low sulphur content.
Key Libyan crude and oil product terminals east of the capital are in the hands of rebels who have seized control from leader Muammar Gaddafi.
The unrest in Libya followed massive protests in Tunisia and Egypt which led to the toppling of their long-time leaders and has spread to other Middle East Gulf nations.
"When geopolitics in the Middle East are at play in the oil markets, all conventional bets on the direction of oil prices based on supply and demand fundamentals, or economic variables, are off," analysts at BNP Paribas said in a research note.