* Kuwait says OPEC discussing output increase
* Arab media say Gaddafi looking for agreement to step down
* Brent's premium over WTI shrinks to $10 from $17 last week
* Coming Up: API U.S. oil inventory report; 2130 GMT
(Adds Iran comments on OPEC meeting)
By Alejandro Barbajosa
SINGAPORE, March 8 (Reuters) - Brent crude briefly dropped
more than $2 to below $113 as Kuwait's oil minister said OPEC
was in talks to boost production for the first time in more than
two years, but oil pared losses on supply worries stemming from
the Middle East unrest.
An official output increase by OPEC would signal the group's
determination to put a cap on prices and keep the global
economic recovery on track after revolutions in Tunisia and
Egypt and protests from Morocco to Oman sent Brent crude to
almost $120 a barrel last month, the highest since 2008.
A brewing civil war in Libya has idled as much as two-thirds
of the country's oil output, or 1 million barrels per day (bpd),
eliciting calls from consumers of OPEC oil to boost production.
"We are in consultations about a potential output increase,"
Sheikh Ahmad al-Abdullah al-Sabah told reporters, soothing
markets rattled by the Middle East unrest. He, however, added
that there was no decision for the group to produce over quotas
yet.
Brent crude for April fell as much as $2.25 to
$112.79 a barrel, the lowest price in a week, and was down $1.04
percent at $114 at 0850 GMT. That's down about $6 from a Feb. 24
peak of $119.79, the highest price since 2008, when it reached a
record $147.50.
"There's no doubt the market is concerned about supply at
the moment so any comments giving support to supply would be a
trigger for profit-taking," said Mark Pervan, head of
commodities research at ANZ in Melbourne.
"I would still say the market is finely balanced and the
news won't trigger a lot of selling in the near term."
U.S. crude closed above $105 on Monday, its highest since
September 2008. On Tuesday it was down $1.36 at $104.08.
Saudi Arabia, the world's largest oil exporter and home to
most of the spare capacity held by the Organization of the
Petroleum Exporting Countries, is pumping about 9 million bpd,
almost 1 million bpd above its quota.
According to a newspaper report, OPEC members are joining
Saudi Arabia in raising output to cool soaring prices and allay
fears of a supply crunch in the West.
Still, not all members in OPEC seem to agree about the need
for additional output.
"There is no shortage in the market. There is no need for
further OPEC supply," Iran's OPEC governor Mohammad Ali Khatibi
told Reuters in a telephone interview on Tuesday. Iran currently
holds the presidency of OPEC.
Concern has prevailed that violence and supply disruptions
may spread to other countries in the region amid the Libyan
turmoil. But so far oil is flowing as usual from the world's
biggest producers in the Mideast Gulf.
"The massive spike that we've seen in the price of oil has
literally been driven by the geopolitical concern. As soon as
those short-term speculative motives are removed from the
market, I expect to see a sharp drop in crude prices to below
$100 and traders to focus on fundamentals again," said Matthew
Lewis, an analyst at CMC Markets in Sydney.
Prices had already dropped by less than $1 a barrel before
the Kuwaiti minister spoke on reports Libyan leader Muammar
Gaddafi was looking for a way to step down,
Two Arab newspapers and al Jazeera television said on Monday
Gaddafi was looking for an agreement allowing him to step down,
but there was no official confirmation of the reports.
"In terms of the Libyan crisis, there is a lot of
speculation that perhaps Gaddafi is looking to extradite
himself. That may put an end to the crisis and the oil price
would fall fairly rapidly," Lewis said.
The Brent/WTI <CL-LCO1=R> spread has shrunk by more than $7
since last week's record, ending Monday at its narrowest since
January.
"There has been quite a large disparity between Brent and
WTI, and that has come to the attention of traders as an
opportunity to buy the WTI and sell the Brent on the expectation
that the disparity will subside," Lewis of CMC said.
Major Libyan oil ports Ras Lanuf and Brega in the east of
the country are closed as violence in the area has hampered
operations at the terminals, shipping sources said on Monday.
But a coordinated release of strategic oil stocks by OECD
economies is not yet needed because the oil supply disruption
caused by an uprising in Libya remains limited on a global
scale, the International Energy Agency (IEA) said on Monday.
The White House said on Monday the price of oil was one
factor -- but not the only factor -- that would be used when
determining whether the United States will tap its strategic oil
reserve.
U.S. crude oil stockpiles could have risen by 300,000
barrels last week as imports likely rose, a preliminary Reuters
poll ahead of weekly inventory reports showed on Monday.
The industry group American Petroleum Institute (API) will
issue its weekly inventory report on Tuesday, at 2130 GMT,
followed by government statistics from the U.S. Energy
Information Administration on Wednesday, at 1530 GMT.
(Additional reporting by Francis Kan; Editing by Himani Sarkar)
