By Mark Shenk  

Oil fell amid speculation that an escalating conflict in Libya won’t curb supply enough to shrink a global surplus that’s driven crude into a bear market.

West Texas Intermediate and Brent futures erased early gains. Fires have been extinguished at three of six tanks at Es Sider, Libya’s largest oil port, which were set ablaze after an attack by militants, said National Oil Corp. spokesman Mohamed Elharari. Algerian Energy Minister Youcef Yousfi called on OPEC to cut output to boost prices, the Associated Press reported.

Futures plunged 46 percent this year, set for the biggest annual drop since 2008, as the Organization of Petroleum Exporting Countries resisted supply cuts to defend market share in response to the highest U.S. output in three decades. Libya pumped 580,000 barrels a day in November, down from about 1.59 million at the end of 2010, data compiled by Bloomberg show. Trading was below average amid Christmas and New Year holidays.

“There was a pop off of the Libya headlines earlier today,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone. “A year ago this kind of headline would have spurred a $3-to-$4 rally. The market is so oversupplied right now that it can’t muster a rally on what are bullish headlines.”

WTI for February delivery fell 17 cents to $54.56 a barrel at 12:01 p.m. on the New York Mercantile Exchange. It climbed as much as 1.9 percent to $55.74 earlier today. Futures touched $53.60 on Dec. 16, the lowest level since May 2009. The volume of all futures traded was 50 percent below the 100-day average for the time of day.

Civil War

Brent for February settlement slipped 33 cents to $59.12 a barrel on the London-based ICE Futures Europe exchange. Volume was 57 percent below the 100-day average. The European benchmark traded at $4.57 premium to WTI, down from $4.72 on Dec. 26.

Libya’s oil production slumped after a civil war that began in 2011 when dictator Muammar Qaddafi was overthrown after a 42-year rule. The tank fires started on Dec. 25 after the Petroleum Facilities Guard gave Islamist militias an ultimatum before air strikes and the rebels fought back with rockets.

The Es Sider facilities have a total storage capacity of 6.2 million barrels, according to National Oil Corp. Libya’s third-largest port of Ras Lanuf was also halted this month by fighting. The country pumped 352,000 a day on Dec. 25, Elharari said.

“The Libyan situation will tighten things a bit,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “There’s still an awful large amount of surplus oil even with the loss of Libyan barrels. We’re still within striking distance of multiyear lows and it wouldn’t take much to get us to test them again.”

OPEC Quota

OPEC needs to “intervene to correct the imbalance and cut production to bring up prices and defend the income of its member states,” Algeria’s Yousfi said, according to the AP.

The 12-member group decided at a Nov. 27 meeting to maintain its collective output quota at 30 million barrels a day. It pumped 30.56 million a day in November, exceeding that target for a sixth straight month, a Bloomberg survey of companies, producers and analysts shows.

Prices tumbled on Dec. 24 after an Energy Information Administration report showed that U.S. crude and fuel inventories surged the prior week. The EIA, the Energy Department’s statistical arm is scheduled to report on supplies last week on Dec. 31.

Gasoline Falls

“Concerns that this week’s numbers will be similar to those last week are going to keep prices from climbing far,” Yawger said.

Gasoline futures decreased 1.37 cents, or 0.9 percent, to $1.495 a gallon in New York. Diesel slipped 1.23 cents, or 0.6 percent, to $1.8956.

Regular gasoline at U.S. pumps fell to the lowest level since May 2009. The average retail price slipped 1 cent to $2.287 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Hedge funds and other financial traders pared overall bullish bets on Brent crude for the first time since before OPEC’s decision to maintain production levels.

Money managers curtailed net-long positions by 15 percent to 112,886 contracts in the week ended Dec. 23, according to ICE Futures Europe exchange. They had added to net-longs in the previous four weeks, increasing them in the week to Dec. 16 to the highest level since July, even as Brent fell below $60 a barrel for the first time since 2009.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net; Bill Banker at bbanker@bloomberg.net Stephen Cunningham, Charlotte Porter

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