Oil price pressures ease after Thursday's sharp gains

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Oil prices have retreated from Thursday's multi-year highs amid optimism producers could offset a drop in supply caused by unrest in Libya.

Brent crude was trading at $112.33 a barrel, after almost breaking through the $120 mark earlier in the week.

US light crude was back at $98.26 a barrel having earlier surged past $100.

Reports suggest Saudi Arabia has increased its oil production by almost 10% to offset production shortages resulting from the unrest.

Global stock markets gained ground after the threat of rocketing oil prices receded.

Leading European markets Paris and Frankfurt maintained rallies into the afternoon, while London's FTSE 100 index also caught up after lunch after being suspended all morning because of a technical fault.

On Friday, Singapore's STI stock index and Hong Kong's Hang Seng saw increases of more than 1% while markets in South Korea, Japan and Taiwan also gained.

'Verbal finesse'

Analysts said that the mood had been helped by comments from Saudi Arabia and the International Energy Agency (IEA).

Saudi Arabia has said that it would step in to fill any shortfall in supply should it be needed now, or should the Libyan situation deteriorate.

Reuters news agency quoted an oil industry source saying that Saudi had increased production by 700,000 barrels a day to more than 9 million a day in total.

At the same time, the IEA said that Libyan production had been less affected than many observers had first forecast.

Recovery 'at risk'

However, IEA chief economist Dr Fatih Birol warned that even if oil prices return to their pre-crisis levels, they still remain dangerously high and could pose a risk to the global economy.

"Lets try to remember that before anything started to happen in the Middle East, in Egypt, the price was about $95 - not very low compared to current levels," he told BBC World Service.

"And if this turmoil calms down - and I hope it does, quickly - if the prices are still $90-95, there is still a significant risk they could derail the economic recovery."

He added that the events in Libya and elsewhere were only making the situation even more grave.

"We should start to understand that the age of cheap oil is over," he added.

'Fear factor'

Analysts said that the markets want to see crude supplies becoming available as and when they are needed.

Trying to predict the oil price when it is being driven by geopolitical events, rather than the fundamentals of supply and demand, is particularly difficult, analysts say.

"The fear factor in the market remains high, as the extent of contagion remains unknown," said Barclays Capital.

"The price correction, should the situation in the Middle East ease somewhat or in the event of Opec production increases, is likely to be quite sharp."

However, others argued that the drop in the price of oil seen on Thursday afternoon would be short lived.

"I think oil prices are going to trade higher, even with Saudi assurances," said Tom Kaan at Louis Capital Markets in Hong Kong.

"I think Opec wants to see higher oil prices."