Oil prices fell below $105 a barrel Tuesday on the news that OPEC members were discussing the possibility of boosting oil production to stabilize markets rocked by Libya's violent clashes.
By early afternoon in Europe, benchmark crude for April delivery was down 75 cents at $104.69 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $1.02 to settle at $105.44 a barrel on Monday after nearly hitting $107, the highest level since Sept. 26, 2008.
The Nymex contract dipped as low as $103.33 earlier Tuesday after the Kuwaiti oil minister said OPEC, which accounts for over a third of global oil production, is considering how to deal with the situation.
"We are in consultation, but we have not decided which direction," said Kuwait's oil minister, Sheik Ahmed al-Abdullah al-Sabah, without providing more details.
OPEC, which according to analysts at Platts is producing almost 30 million barrels of oil a day, is not scheduled to meet again formally until June 8 in Vienna. The group has repeatedly said the spike in prices is fueled by market fear driven by speculative investors rather than a tangible shortage of supply.
Media reports suggesting that longtime Libyan leader Moammar Gadhafi is considering stepping down may have also contributed to falling prices.
"Although there is no confirmation of this at all, it is very likely to have triggered profit-taking by speculative financial investors," said analysts at Commerzbank in Frankfurt. "We still believe the current fall in prices is only a temporary phenomenon."
In fact, prices were still near their highest level since late 2008 as battles continued between Libyan rebels and forces loyal to Gadhafi.
Libya, which sits on the largest oil reserves in Africa, has been engulfed in a four-week rebellion as militants try to oust Gadhafi after 41 years in power. Officials in the country say oil fields continue to operate, though experts say daily exports - which normally are 1.5 million barrels - are down and could be cut off for some time.
On Tuesday, Libyan warplanes launched more airstrikes on rebel positions around the Ras Lanouf oil port as Gadhafi's forces tried to keep rebels from advancing on his stronghold in the capital, Tripoli.
Europe and the U.S. are tentatively examining plans for a possible no-fly zone, though no decision has yet been made to introduce a resolution at the U.N. Security Council.
"A no-fly zone greatly reduces the risk of Gadhafi bombing oil installations in an act of despair," said Olivier Jakob of Petromatrix in Switzerland. "We continue to expect that once the UN starts to run a humanitarian operation in Libya then the crude oil should find its way back to export terminals relatively quickly."
The Energy Information Administration estimates OPEC can crank up production by another 4.7 million barrels per day. An extended shut down of Libya's exports would slice that capacity by about 32 percent to around 3.2 million barrels per day. Most of the world's spare capacity lies in OPEC nations, primarily Saudi Arabia.
The market will also be watching for fresh figures on U.S. oil stockpiles.
Data for the week ending March 4 is expected to show a build of 2.3 million barrels in crude oil stocks and a draw of 2.1 million barrels in gasoline stocks, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.
The American Petroleum Institute will release its report on oil stocks later Tuesday, while the report from the Energy Department's Energy Information Administration - the market benchmark - will be out on Wednesday.
In London, Brent crude was down 79 cents at $114.25 a barrel on the ICE futures exchange. In other Nymex trading for April contracts, heating oil was down 1.85 cents at $3.0472 a gallon and gasoline fell 1.39 cents to $2.99 a gallon. Natural gas was down 0.7 cent at $3.934 per 1,000 cubic feet.
Paul Schemm and Maggie Michael in Ras Lanouf, Libya, and Adam Schreck in Dubai, United Arab Emirates, contributed to this story.