Oil hits two-week low as Syria tensions ease

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Oil prices on both sides of the Atlantic fell by more than $2 a barrel on Tuesday as Syria accepted a Russian proposal to give up its chemical weapons, easing concerns about the potential for U.S. military strikes against Damascus.

Syria accepted a Russian proposal on Tuesday to give up chemical weapons and win a reprieve from U.S. military strikes but serious differences emerged between Russia and the United States that could obstruct a U.N. resolution to seal a deal.

Brent posted its largest two-day drop since June, shedding 4 percent in the past two sessions. Brent has lost over $6 since Aug. 28, when fear of an imminent military strike on Syria pushed the global benchmark above $117.

While Syria is not a major oil producer, investors fear a U.S.-led military strike could stir broader conflict in the Middle East, which pumps a third of the world's oil.

"The market is in the process of removing the risk premium that Syria attributed to it," said Andy Lebow, vice president at Jefferies Bache in New York.

Brent for October delivery fell $2.47 to settle at $111.25 per barrel, after sliding more than $3 to a session low of $110.59, its weakest level since Aug. 26.

U.S. crude fell $2.13 to settle at $107.39 per barrel, after reaching a session low of $106.39. The contract has lost nearly $5 since reaching a 28-month high of $112.24 late last month.

The Brent-WTI spread widened to $4.81 in early trade before closing at $3.86, its lowest level since Aug. 19.

Investors also received a faint signal that oil exports from Libya could pick up soon. On Monday, the head of the Libyan government energy committee said a group tasked with resolving that country's oil paralysis will brief the General National Congress with proposals on how to end various confrontations, although a union official warned workers could launch new protests if a long-term solution was not found.

Last week, Libya's oil output fell to a post-war low of 150,000 barrels per day compared to its capacity of 1.6 million bpd. Exports have fallen to 80,000 bpd.

Front-month oil futures may also be under pressure because passive commodities investors have been selling front-month positions and taking positions in the second month, a monthly process called the "passive roll."

"You're selling the front month and buying the back month, so maybe it's softening the curve a little bit," said Lebow, indicating the spread narrowed between contracts for U.S. crude for October and November delivery.

Despite total outages that the U.S. Energy Information Administration (EIA) estimated at 2.7 million bpd last month, the Organization of Petroleum Exporting Countries (OPEC) said the world oil market was well supplied and forecast a further drop in its oil market share in 2014.

The EIA raised its 2013 world oil demand growth forecast by 20,000 barrels per day to 1.11 million bpd. In its monthly forecast, the agency cut its oil demand growth estimate for 2014 by 30,000 bpd to 1.19 million bpd.

U.S. crude stocks fell by 2.9 million barrels in the week to Sept. 6 to just under 359.5 million barrels, compared with analysts' expectations for a decrease of 1.5 million barrels, data from industry group the American Petroleum Institute showed on Tuesday. Gasoline stocks rose by 195,000 barrels, compared with analysts' expectations in a Reuters poll of a 1.3 million barrel decline.

Investors await Wednesday's more closely-watched report from the EIA, to be released at 10:30 a.m. EDT. (Additional reporting by Lin Noueihed in London and Manolo Serapio Jr. in Singapore; Editing by Chris Reese, David Gregorio and Diane Craft)



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