Oil prices head lower as Libya resolution appears near

U.S. oil futures slipped further below the key $100 a barrel level, and international crude moved closer to U.S. prices as some geopolitical pressures eased.

Oil fell on progress in the eight-month standoff at Libyan ports but appears to have shrugged off tensions surrounding Ukraine and even a weekly U.S. government report Wednesday that showed a surprise drop in U.S. inventories. Traders, however, wrote off the decline of 2.4 million barrels in the week ended March 28 as a temporary dip because of the shutdown of the Houston shipping channel for three days two weeks ago.

Crude has been weakening as progress appears to be made in Libya, which has had about 1.3 million barrels a day off the market. News reports that a rebel group agreed with the Libyan government to give up its seizure of ports led to optimism Libyan oil will come back on the market.

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"I'm surprised that all of the geopolitical risk put in last week has been wiped out today," said Tradition Energy analyst Gene McGillian. He said the market, at this point, may be trading lower on Libya, but it is not reflecting concern about Russia's annexation of Crimea and whether it is considering other action.

Read MoreLibya says could reach deal to open ports in two to three days

West Texas Intermediate futures settled at $99.62, off 12 cents, and Brent, the international benchmark was just under $105 per barrel.

Russian troops remain on the Ukraine border, and the North Atlantic Treaty Organization's top commander Wednesday said it would take three to five days for those troops to achieve a major incursion into eastern or southern Ukraine. NATO officials are drawing up a plan that could include deploying forces and equipment in Eastern Europe.

Read MoreNATO allies pledge to beef up eastern defenses

"I kind of sense the way we moved lower in Brent prices, the market is assessing that there's not much to be done about Russia taking possession of Crimea," said McGillian. "I don't think sending troops into Poland is really a riskless kind of move."

Some analysts have said the next move for world oil prices is likely lower, as growing U.S. oil supplies outweigh some of the impact of tensions surrounding Ukraine and also helped compensate for the lack of Libyan oil on the market. Crude stockpiles last week fell to 380.1 million barrels, while analysts expected an increase of about 700,000 barrels.

The U.S. oil boom is clearly having a growing impact on world oil prices, and now the release of more crude via the southern leg of the newly opened Keystone pipeline running from Cushing, Okla., to Port Arthur, Texas, is creating a gusher of new supply on the Gulf Coast.

"I'm pretty bearish crude prices because I see there's a significant amount of supply out there, and I suspect U.S. supply is going to continue to grow through the course of the year," said Andrew Lipow, president of Lipow Oil Associates. "I suspect by the end of the year, we'll be producing close to 9 million barrels a day." The U.S. is now producing the most oil since 1988, about 8.2 million barrels a day—up by about 3 million barrels from January 2011.

"We're in the driver seat. We're going to continue to be in the driver's seat. It's us and Canada," said Dennis Gartman, publisher of The Gartman Letter.

Gartman and McGillian said the draining of oil from Cushing should be supportive of WTI prices, as more oil comes on the market, and converges with world oil prices. Oil at Cushing now totals 27 million barrels, a near five-year low and well below the peak levels above 50 million barrels.

The controversial northern leg of the Keystone pipeline is still awaiting presidential approval. But the southern section has been operating since late January. That pipeline and the Seaway pipeline to Houston have been rapidly draining the Cushing storage facility and delivering oil to refineries. Cushing is the physical storage hub for West Texas Intermediate futures.

"They had built up Cushing stocks to an all-time high because it was basically a bottleneck of oil that reached Cushing but not the Gulf Coast," McGillian said. "That basically pushed the premium of Brent over WTI to $25, $30. Now there's demand for that oil to be processed, and the premium is $5. ... The telling point will be with all this additional oil, do they have the demand and capacity to process it and sell it."

Barring further geopolitical developments, McGillian expects WTI to trade down to $95 a barrel. But others expect it to fall further, and see the exit of oil supplies from Cushing as a weight on prices.

Read MoreCan Russia come back from the cold?

"It's causing Gulf Coast inventories to rise markedly," said John Kilduff of Again Capital. "If the Gulf Coast supply situation could break the back of any remaining tightness in the international market. I think it (WTI) could test the low 70s. It could be one of those market disruption events if that occurs."

The U.S. still imports oil—about 7.3 million barrels a day last month, but the source of those imports is changing. Canada remains the biggest supplier and Saudi Arabia is second, but African crude is losing ground. The U.S. imported just 34,000 barrels a day of Nigerian crude in January, down from 300,000 a year earlier. In 2008, the U.S. imported 9.8 million barrels a day.

"I look at what crude oil on the Gulf Coast is trading at relative to crude oil at Cushing," said Lipow. "It's only 50 cents to a dollar more than Cushing, which does not pay for the pipeline tariff and that's an indication of glut appearing on the Gulf Coast."

Citigroup expects Brent to average $103 this year, and average about $100 for the second quarter and drop to $99 in the fourth quarter.

"I think you're seeing a reconnection of the North American market with the Atlantic basin Brent," said Eric Lee, analyst at Citigroup.

Lee said there have been more geopolitical events than Citi analysts calculated when coming up with oil price targets, and there are hot spots that could flare up and impact supplies, like Venezuela, Iraq and Nigeria.

As for Ukraine, Citi analysts issued a report this week saying there is basically a stalemate over Ukraine because of Europe's dependence on Russian energy and Russia's dependence on its European customers.

As much as 75 percent of Russian gas exports and 80 percent of oil exports go to Europe. While Europe gets 30 percent of its gas from Russia and about a quarter of its crude oil.

"I think that's been part of the trickiness and the calculus on both sides. You've seen no change in supplies, and if anything Russia has upped its gas supply to Europe. If you look at recent numbers, and on the European side, they're very careful not to touch that side of the sanctions," Lee said.

U.S. refineries have been using more oil and are exporting more refined product to the world market. Crude exports are largely restricted, and there have been increased calls to export to Europe because of the situation with Russia, a major source of European oil and gas.

Lipow said U.S. oil has displaced Gulf Coast imports of light sweet crude from Nigeria, Libya and Algeria. "As the buildout of crude by rail to the East Coast gets completed, we will displace all imports of light sweet crude into that region by the third quarter of this year," he said.

As for growing U.S. production, it is expected to continue to expand. "Several states are setting records. Texas is about to surpass Kuwait as an oil producer," Lipow said. Texas production was just slightly below Kuwait's 2.9 million barrels a day in January.

—By CNBC's Patti Domm.