At 1103 GMT, Brent crude was up 18 cents lower to $108.54 a barrel. US October crude was up $1.12 to $85.54, supported by expectations that US oil stockpiles released later in the session may drop.

Forces still loyal to Libyan leader Muammar Gaddafi fought rebels in Tripoli on Tuesday, extending a conflict that looked close to conclusion on Monday after rebels swept into Tripoli in tandem with an uprising within the city.

The extent of the loyalists' strength surprised some in the market, after Brent fell on Monday on hopes for a quick resolution and a speedy restart in exports from the OPEC member.

Investors focused on the positive from the flash purchasing managers' indexes from Germany and China, which, although showing the factory sector was likely to slow, indicated the motors of the global economy in recent years were still growing robustly.

But Brent -- a benchmark measuring oil prices from Atlantic fields -- continued to under perform US crude, equities and other commodities like copper , with expectations the Libyan conflict will come to a conclusion relatively soon, limiting gains.

"There's light at the end of the tunnel in Libya and any signs that the conflict is ending will push Brent down as there will be more oil into the Atlantic basin," Helen Henton, analyst at Standard Chartered said.

Analysts were divided on the implications of the latest developments in Libya. Citigroup lowered its price forecast for US crude to $89.69 per barrel for 2011 and $71.75 for 2012, citing weak global demand.

Goldman Sachs by contrast said despite a likely increase in production from Libya at the top end of its forecast, it would be "only a matter of time" until OPEC spare capacity was exhausted, requiring higher oil prices to restrain demand.

Libya would be able to restart some oil output in a few months, the country's former top oil official said on Monday. But it would take as long as 18 months to reach the pre-war level, Shokri Ghanem said.

Before the conflict, the country pumped around 1.6 million barrels per day (bpd), nearly two percent of global output.

Most of Libya's high quality crude went to European refiners. The prospect of an increase in supply of light sweet crude into Europe has led to the spread between Brent and US crude narrowing.

However the latest news that Gaddafi loyalists appeared to be making progress highlighted the difficulties inherent in bringing Libya's oil capabilities back on tap.

"Come the time that rebels take power, the potential for Gaddafi loyalists to seek revenge and target oil installations is high, while threats to personnel may also emerge," JBC said in a note.

"The rebels may find that winning the war is one thing but securing the peace is something more elusive."

A son of Muammar Gaddafi -- who rebels said they had captured -- appeared with cheering supporters in Tripoli, giving a boost to forces loyal to the veteran leader. The whereabouts of his father remained a mystery.

BRENT PREMIUM NARROWS

Brent's premium to US crude fell to around $23 a barrel after scaling a record high of $26.69 on Friday.

A fall in US crude stockpiles could lead to a further contraction in the spread. US crude inventories were forecast to have fallen due to lower imports, a preliminary Reuters poll showed on Monday ahead of weekly data.

Four of seven analysts polled expected crude stock piles to have dropped in the week to Aug. 19, with the average forecast showing a drawdown of 200,000 barrels.

The latest storm in the Atlantic hurricane season poses no threat to oil operations in the Gulf of Mexico, forecasters said. Irene strengthened into a Category 2 hurricane as it swept north of the Dominican Republic on Monday.

Investors will watch Fed Chairman Ben Bernanke, who will make a speech on Friday in Jackson Hole, Wyoming, at an annual gathering of policymakers and academics.

Recent market turmoil and signs of weaker US growth have boosted expectations Bernanke may raise the prospect of more emergency stimulus for the world's largest economy and top oil importer.

At last year's meeting, Bernanke hinted at what eventually became a $600 billion quantitative easing bond-buying programme, known as QE2. But some economists said Bernanke may hold off on aggressive easing plans this year.

Copyright Reuters, 2011