Brent holds above $111 as supply worries offset higher US crude stocks

Oil rigs just south of town extract crude in Taft, California.
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Brent futures held above $111 a barrel on Thursday on worries that supply from OPEC member Libya will continue to be disrupted as winter oil demand increases, but a bigger-than-expected rise in U.S. crude stocks kept the gains in check.

Libyan Prime Minister Ali Zeidan said his government would be unable to pay public salaries and may have to seek loans if armed militias blockadingoilfields and ports continue to choke off crude shipments.

(Read more: US to surpass Saudi as top oil producer by 2016: IEA)

But a surge in U.S. crude production to the highest since 1989 may mean the gains for oil will be limited once demand eases after winter due to a weak global growth outlook.

Brent crude gained 4 cents to $111.35 a barrel by 0746 GMT after settling 43 cents higher over night. But U.S. oil fell 13 cents to $92.17, hovering near the lowest in almost six months. It touched a low of $91.77 on Wednesday, its weakest level since June 3.

"The weather and supply issues are supporting oil at the moment," said Jonathan Barratt, chief executive of commodity research firm Barratt's Bulletin in Sydney.

"But beyond that, we are seeing inventory levels are rising, the demand outlook is weak and there is a possibility of more supplies coming into the market."

(Read more: Libya may deepen Brent's premium over US oil)

Zeidan's warning and renewed armed clashes, including an attack on a centuries-old shrine near Tripoli, have added to a growing sense of chaos in Libya two years after the NATO-backed ousting of Muammar Gaddafi.

But Barratt expects the Libyan government to come to an agreement with the militias, given that nearly all of the country's revenue comes from oil exports. Once that happens, supplies could rise by about 1 million barrels per day (bpd).

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International Energy Agency (IEA) head Maria van der Hoeven said oil markets were adequately supplied even with the prospect of dwindling crude output from Libya.

In addition, Iranian supplies may increase if Tehran follows through on its commitments reached in a breakthrough deal with world powers over its nuclear programme at the weekend.

That, and dwindling U.S. demand for imported oil, may push prices lower in the next few months.

"That's the next big question - how do you find a home for all the oil that the U.S. has and will stop importing?" said Barratt. "That's the elephant in the room."

(Read more: Iran oil, energy sanctions still in force after nuclear deal: US)

Price outlook

Barratt sees an immediate support for U.S. oil at $92.50, with prices falling to $90 if that level is breached. Over the next few months, there is a possibility that both the benchmarks head to around $80 a barrel, he said.

Last week, crude oil stocks rose by almost 3 million barrels to 391million barrels, their highest level for November since records began in 1982.

The Energy Information Administration also said crude oil output last week exceeded 8 million bpd for the first time since January 1989. Earlier this month, its data showed that crude production exceeded imports for the first time in nearly two decades.

"Although refinery operations are picking up, this incremental demand for crude is insufficient to offset continuing strong domestic production," analysts at BNP Paribas said in a note. "With U.S. and Cushing inventories climbing, greater pressure on the WTI structure and the WTI/Brent differential has emerged."