Oil prices fell from near 2-1/2-year highs on Thursday as traders took profits after Venezuela pitched a plan to resolve the Libyan crisis, even though the market was deeply skeptical about whether it would work.
The pull-back follows two days of strong gains that sent a key technical indicator to its most overbought level in more than five years for Brent crude. Few traders expect any quick resolution to the violence that has halved Libyan oil output and sparked concerns over unrest across the Middle East.
"I am highly skeptical the market is coming off on assumptions that Chavez will successfully mediate in Libya," said Stephen Schork, editor of The Schork Report in Villanova, Pennsylvania. "I think the market was overbought."
Venezuelan President Hugo Chavez's plan to negotiate a resolution met with little immediate support. The chairman of the rebel National Libyan Council entirely rejected any talks with Libyan leader Muammar Gaddafi while Arab League President Amr Moussa said it was merely "under consideration".
U.S. President Barack Obama said his administration was preparing a full range of options over Libya. The United States and international community must be ready to act rapidly if warranted by a humanitarian crisis or to stop violence against civilians in the North African country, Obama said.
Brent crude futures for April delivery settled $1.56 lower at $114.79 a barrel, after dropping to a session low of $113.09. It had settled at $116.35 on Wednesday, the highest close since August 2008.
U.S. crude futures for April settled at $101.91, down 32 cents, after hitting a low of $100.15. On Wednesday, it closed at $102.23, the first time U.S. crude had finished above $100 since September 2008.
U.S. crude's losses were softened by data showing that the number of Americans filing for jobless benefits for the first time fell last week to the lowest level in more than 2-1/2 years, signaling stepped-up job creation could be under way.
The 14-day Relative Strength Index for Brent topped 80 on Wednesday, the highest level since March 2005, while U.S. crude topped 74, the highest in over 2-1/2 years. Technical analysts consider anything over 70 is overbought.
"Looks like profit taking and buying into the dip. The market was a little overstretched to the upside and the Chavez peace proposal gave traders a reason to square positions," said Tom Bentz, broker at BNP Paribas Commodities Futures Inc in New York.
Open interest in U.S. crude futures has been on the rise in recent sessions and on Wednesday, it hit 1,574,584 lots, just below the record 1,579,109 set on July 16, 2007.
As trading hit a feverish pitch in recent sessions, the CME Group (NasdaqGS:CME - News), parent company of the New York Mercantile Exchange, said it would again raise margins on crude oil trading, effective Friday. It was the second margin increase imposed in two consecutive weeks.
Higher margins tend to compel traders, particularly speculators, to close out positions, as it drives up investment costs.
Brent's premium to U.S. crude shrank to below $13 after last week's record $16.91. Investors were unwinding some positions on the Brent-West Texas Intermediate spread, knocking down Brent faster than U.S. crude, traders said.
LIBYA CUT, EMPTY TANKERS SAIL
Libyan output has fallen to 700,000-750,000 barrels per day from normal levels of 1.6 million bpd as most foreign oil workers had taken flight, according to Shokri Ghanem, the head of Libya's state-owned oil company.
Despite the unrest, tankers were still leaving and waiting to enter Libya's ports, sources said. At least one empty tanker left a Libyan terminal on Thursday to take on cargo in Egypt, and at least two more tankers were waiting to enter Libyan ports.