Brent edges down but holds above $109 on low Libyan exports


* Libyan export fall raises supply fears

* Market waits for clues on policy from Fed meeting

* U.S. crude stocks seen up 3.2 mln bbls

By Osamu Tsukimori

TOKYO, Oct 29 (Reuters) - Brent crude edged lower toward$109 a barrel on Tuesday ahead of a Federal Reserve policymeeting but kept most of the previous day's gains after reportsof a sharp drop in Libyan oil exports, which rekindled worriesover supply.

Libya's crude oil exports have dropped to less than 10percent of capacity, or 90,000 barrels per day, due to the worstdisruption in its oil industry since a 2011 civil war.

London Brent crude futures for December deliverywere trading 54 cents lower at $109.07 a barrel at 0746 GMTafter settling up $2.68 on Monday. U.S. crude for Decemberdelivery was down 41 cents at $98.27 a barrel.

Libya's prime minister said exports from the eastern port ofHariga with a capacity of 110,000 bpd would resume after oneweek following a two-month blockade due to strikes and protests,but there were few projections for further restarts.

The Libyan news, combined with talk of unstable productionin Iraq last week, helped push up oil prices on Monday, saidOsamu Fujisawa, a Japanese-based independent oil economist.

"Despite the gains, oil prices are expected to meet withcontinued upside resistance because demand is not growing asfast as supplies through next year as IEA projections show," hesaid.

Oil prices could fall in spite of winter demand in thenorthern hemisphere, with Brent set to drop towards $103 abarrel, he added.

Masaki Suematsu, energy team sales manager at Newedge Japan,said: "Basically, I am not that bullish. I think $105 is thelevel we could see on the downside."

A bomb explosion over the weekend close to a pipelinecarrying crude from a major oilfield in Iraq provided support tothe market, although oil exports were not affected.

"Two of the most volatile oil producers, Libya and Iraq,experienced serious unrest over the weekend, and we think thereis a high risk that the security problems could grow more acuteand affect output in both countries," Barclays analysts said ina note.

Reuters market analyst Wang Tao said Brent was expected toretrace to $108.46 per barrel as it faced resistance at $109.81.

The market is waiting for comment from the Federal Reserve'spolicy-making meeting, which starts later in the day, after dataon Monday showed U.S. manufacturing output barely rose inSeptember and that contracts to buy previously owned homesrecorded their largest drop in nearly 3-1/2 years.

The Fed is widely expected to maintain its current level ofeconomic stimulus as it waits to see more evidence of howWashington's recent budget battle hurt the U.S. economy.

U.S. oil inventories probably rose by 3.2 million barrelslast week, while distillates and gasoline each fell by 1 millionbarrels, a preliminary Reuters poll showed ahead of weekly data.

Investors will also keep an eye on a series of technical anddiplomatic meetings on Iran's nuclear programme that could pavethe way for an easing of sanctions on Iranian crude exports.

Iran is planning to offer international companies morelucrative contracts to attract at least $100 billion ofinvestment in its oilfields over the next three years, theFinancial Times reported on Monday.

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