Oil prices drop as Libyan rebels sweep into Tripoli

Libyan rebels seized full control of the Zawiyah oil refinery last week. Photograph: Bob Strong/Reuters

Oil prices dropped sharply on Monday after rebels swept into the heart of Tripoli, raising expectations that Libyan oil exports could resume soon.

As a battle raged at Muammar Gaddafi's complex in the Libyan capital, Brent crude dropped $3.47 to $105.15 a barrel, a fall of 3%, while US crude was down almost a dollar at $81.30, a 1% drop.

Analysts believe Libya could be pumping as much as 1m barrels a day within months, close to the pre-war figure of 1.6m – nearly 2% of global supply. Most of it flowed to European refiners, and the tightening of supply after Libyan exports stopped drove Brent crude to a two-year high of $127.02 in April.

The FTSE in London fell some 40 points in early trading, taking the index briefly through 5000, before turning positive, trading 60 points higher at 5101. European markets also opened lower before staging a recovery, with France's CAC up 1.2% and Germany's Dax edging 0.4% higher. US stock futures indicate the Dow Jones will open some 80 points higher.

UK government bonds, known as gilts, tumbled as share prices recovered. The September gilt future lost 16 basis points.

"The possibility of a carbon copy of last week looms, with the mayhem of the previous week giving way to an eerie sense of calm," said strategists at Nomura.

The markets shrugged off comments from German chancellor Angela Merkel, who reiterated her opposition to issuing bonds backed by all eurozone countries on Sunday. "It will not be possible to solve the current crisis with euro bonds," she told ZDF television. She added that "politicians can't and won't simply run after the markets. The markets want to force us to do certain things. That we won't do. Politicians have to make sure that we're unassailable, that we can make policy for the people."

The German finance minister, Wolfgang Schäuble, echoed Merkel's comments, saying common debt would make it easier for governments to avoid pursuing responsible fiscal policies.

Asian markets were largely bathed in red, with the Nikkei in Tokyo losing 1%, but the Hang Seng in Hong Kong turned positive in late trading, inching 0.45% higher. There are growing expectations that Japan will intervene in currency markets to weaken the strong yen, and the dollar rose slightly against the yen to ¥76.70.

Earlier, investors scrambling for safe haven investments pushed spot gold prices to a new record of $1,894 an ounce. Platinum hit a three-year high at $1,895 an ounce amid global recession fears.

Citigroup upped its forecast for gold prices on Monday, saying investor appetite for gold had increased due to fears of another US recession following the S&P downgrade of the nation's debt, growing inflationary concerns and the eurozone's debt crisis. It sees gold prices averaging $1,650 an ounce next year and $1,500 the year after, compared with previous predictions of $1,325 for 2012 and $1,225 for 2013.

Citigroup also raised its price target on UK-listed gold miners such as Randgold Resources – which was the top riser on the FTSE on Monday – Centamin Egypt, European Goldfields and African Barrick Gold.

Markets are eagerly awaiting a speech from US Federal Reserve chairman Ben Bernanke on Friday in Jackson Hole, Wyoming. They will scrutinise his remarks for any hints on how America's central bank will tackle the worsening economic outlook and turmoil in financial markets.