Oil prices pulled back from a record over $78 a barrel on Tuesday as international major BP studied ways to keep oil flowing from the largest oil field in the United States.
London Brent crude hit a record high of $78.65 a barrel in intraday trade on concerns that the shutdown of BP's Prudhoe Bay field in Alaska due to pipeline corrosion would tighten supplies to the world's biggest oil market for months.
But news that BP was looking to keep some of the field online during pipeline work pushed Brent to settle 75 cents lower at $77.55 a barrel. US crude settled down 67 cents at $76.31 a barrel.
"We are having dialogue with those important stakeholders (federal and state regulators) to determine if there is an assurable safe method for maintaining some level of production," said BP spokesman Daren Beaudo.
US Energy Secretary Sam Bodman said BP may be able to keep up to half of Prudhoe Bay production online during work, and the US government added Saudi Arabia and Mexico had pledged to help meet any supply shortfalls.
"Secretary Bodman came out and tried to allay people's fears that this was an urgent crisis," said Peter Beutel, president of Cameron Hanover. "Later in the day traders started to sell when they took his suggestion that perhaps the western part of the Prudhoe Bay field may not have to be closed."
Crude rallied on Monday on expectations the United States will need to import more oil to make up for closure of the Alaskan field that pumps 8 percent of domestic output. BP began shutting operations on Sunday.
"Early today, people were taking comfort from promises by Opec that it could provide whatever is lost from BP's shutdown of its Prudhoe Bay oil field," said Phil Flynn, analyst at Alaron Trading. "The US DOE pledge that it was ready to loan oil from its strategic stockpiles to refiners affected was also reassuring."
The outage added to traders' concerns about the adequacy of supply in view of violence in the Middle East and prolonged production outages in Nigeria.
US oil prices have risen by more than 25 percent since the start of the year, driven upward by the shut in of over 700,000 bpd of Nigerian crude and concerns about supplies from the Middle East.
The West's dispute with Iran over its nuclear program has raised concern of a possible disruption exports from the Opec nation. Anxiety that a four-week-old conflict between Israel and Lebanon could spread to large oil producers in the Middle East has also supported prices.
High oil inventory levels have created some supply cushion in the United States. But US government stock data to be released on Wednesday are expected to show an 800,000 barrel draw in crude stocks last week, with gasoline stocks off 1.1 million barrels, according to a Reuters poll.
Another anxiety for the market is the US hurricane season, which continues until around November. Hurricanes last year temporarily knocked out a quarter of US crude and fuel production and sent prices to what were then record highs.
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