Brent oil prices rebounded towards $116 a barrel on Wednesday as intense fighting in Libya stoked more supply worries and US crude fell as inventories rose sharply, widening Brent's premium against US crude. Brent crude for April delivery gained $2.60 to $115.66 a barrel by 2:45 pm EST (1945 GMT) having earlier hit $116.18.
-- US crude at Cushing hits record 40.26m barrels
US April crude settled at $104.38 a barrel, down 64 cents, after hitting an early high of $105.92. Brent crude's premium against US benchmark West Texas Intermediate crude widened to more than $11, from just below $8 on Tuesday. Muammar Gaddafi's forces struck an oil pipeline leading to the Es Sider town and dropped bombs on storage tanks in the Ras Lanuf oil terminal area in the eastern section of Libya that is rebel-controlled.
But Libyan state television blamed the explosions on "al Qaeda-backed" armed elements. Rebels said they had retaken the main square of the western city of Zawiyah after pro-Gaddafi forces took control of it earlier in the day. The fighting has led to the closure of one of Libya's biggest refineries there.
US crude prices weakened after data from the US Energy Information Administration showed crude inventories rose 2.51 million barrels last week, dwarfing the forecast for an increase of just 400,000 barrels in a Reuters poll. More telling for US crude, crude stocks at the key delivery hub in Cushing, Oklahoma, soared 1.69 million barrels to a record 40.26 million barrels. But losses for US crude were limited as the weekly data showed drawdowns for gasoline and distillate inventories were bigger than expected, reflecting improving demand.
Perception of prolonged trouble in Libya was driving the rally in oil prices, said Christopher Bellew, an oil trader at Bache Commodities in London. "As the outlook for Western intervention looks less likely - which would bring things to a quick conclusion - then we are looking at a prolonged struggle," he said.
About 1 million barrels per day of Libya's output have been shut by the raging conflict. Libya, a member of the Organisation of the Petroleum Exporting Countries, has a normal production of 1.6 million bpd. Libyan oil trade has been paralysed as banks decline to clear payments in dollars due to US sanctions, though Austrian energy group OMV said it had been buying small amounts of Libyan crude oil and would continue to do so. Nato Secretary-General Anders Fogh Rasmussen said the alliance was not looking to intervene in Libya, but its military was ready to respond at short notice. World powers were still considering imposing a no-fly zone over the Libya, with British Prime Minister David Cameron seeking international support for any measures to be taken.