Oil retreated 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.
Brent crude futures for April were up 14 cents at $111.50 a barrel by 11:35 a.m. EST (1635 GMT) on Friday, slipping from $113.91 hit earlier. They touched $119.79 on Thursday, the priciest since August 2008
U.S. crude futures for April fell 8 cents to $97.20, off a $99.20 high touched earlier in the day. They hit $103.41 on Thursday, the highest since September 2008.
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," Mr. 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 has 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 the spike in prices.
In terms of the volume, the increase could compensate for at least a part of the loss of Libyan supply due to civil unrest in the North African country.
The estimates of Libya's shut-in volume varies. The International Energy Agency said Libyan oil output had 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 might be down.
Libya is an OPEC producer with normal output of 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.
Still analysts and traders said the outage would lend support to oil prices.
Some industry officials and physical oil traders said the difference in qualities between Saudi and Libyan oils may make it difficult to fill in the supply gap immediately.
Italian refiner Saras said it 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 with 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 Moammar Gadhafi.
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.
"While Tunisia and Egypt hold little relevance for the global oil market, Libya is a different kettle of fish. It is by no means the biggest oil producer in the world ... but it still accounts for around 2 per cent of total output," an economist with HSBC said in a research note.
"If the Libyan oil taps were turned off - and, in the event of a destructive civil war, remained off for the foreseeable future - either oil output would need to come from somewhere else, or instead oil prices would have to rise."