Fresh hopes for a resumption in Libyan oil supplies may drive world crude oil prices lower in coming months but that won’t begin to happen until the country’s leader Muammar Gadaffi is finally driven from power, analysts said.

Prices for the US benchmark West Texas Intermediate crude oil contract edged higher Tuesday morning after the reappearance of Gadaffi’s son Seif El-Islam before western journalists–despite rebel claims that the dictator’s heir apparent had been captured–indicating that rebels still did not control the capital Tripoli.

El-Islam’s appearance contradicted widespread reports on Monday that government forces were in retreat and that the dictator’s 42-year rule was effectively at an end.

The six-month civil war cut all but about 60,000 barrels of Libya’s approximately 1.5 million barrel-per-day supply of light sweet crude, prompting the International Energy Agency in June to make a rare release of 60 million barrels from its 28 member countries to prevent what the agency called a “serious market tightening.”

The market impact of that oil release was dramatic; Breaking Energy covered it in Broader Economic Concerns Behind Oil Reserve Release.

The expectation that a new rebel-controlled government would work to quickly repair damaged oil infrastructure and restore production of the country’s economically crucial oil supplies drove the European benchmark Brent crude oil contract down by more than a dollar on Monday. US prices rose, with a weakening dollar boosting demand for US crude.

West Texas Intermediate (WTI) prices gained further on Tuesday as continued fighting in the Libyan capital showed a rebel government was not yet in control. By midday Tuesday, WTI for October delivery was trading at $84.77 a barrel, up 35 cents. Brent, whose price has risen more sharply than WTI as the shortage of Libyan crude has cut supplies to European refineries, was up 56 cents at $108.

Analysts React

“We realized we were a bit ahead of ourselves,” said Phil Flynn, an analyst at PFG Best, a Chicago trading firm, referring to Monday’s price decline and its subsequent recovery.

Flynn estimated it would take about a year to fully restore Libya’s lost production after Gadaffi is finally deposed, and only then will the market respond.

“You won’t see that until the general is gone,” Flynn said.

Michael Lynch, president of Strategic Energy & Economic Research in Winchester, MA, predicted the WTI price will fluctuate between $85 and $90 a barrel until early 2012 when it’s likely to fall to about $75 on anticipation of a full resumption of Libyan supply in the second half of the year.

After briefly getting caught in premature post-Gadaffi euphoria on Monday, most oil-market participants now understand that full restoration of Libyan supply isn’t going to happen until late 2012 or 2013, said Tom Kloza, chief oil analyst at Oil Price Information Service in Wall, NJ.

That, together with expectations of global economic growth, especially from Asia, should keep upward pressure on prices.

Sustained high oil prices will keep pressure on energy companies to boost research into alternative forms of energy, as Breaking Energy reported in Beyond Incentives: Oil Majors And Renewable Fuel.

Further Stimulus

Kloza predicted that any announcement of a new round of economic stimulus by Federal Reserve Chairman Ben Bernanke in a widely anticipated speech on Friday would also drive oil and other commodity prices higher.

But the market is also subject to downward pressure from fears of a double-dip recession in the US and Europe, and the possibility that any fresh round of bond buying or “quantitative easing” by the Fed would be interpreted as a sign of new economic weakness.

Until the countervailing pressures are resolved, oil prices aren’t likely to take any particular direction, Kloza said.

“It’s a real tug of war now,” he said. “The market is completely adrift.”

Outside Libya and the Bernanke speech, the market’s immediate focus is Hurricane Irene, which does not appear to threaten Gulf of Mexico oil platforms, but could impact oil demand if it causes significant damage on the US southeast coast.

Photo Caption: Rebel fighters drive through Tripoli on August 23, 2011. Libyan rebels declared the Kadhafi era over after storming Tripoli, but one of the veteran strongman’s sons insisted the battle was far from done as he defiantly refuted reports of his arrest.