Oil dropped sharply from 2-1/2 year highs near $120 a barrel on Thursday following Saudi Arabia's assures it could fill any Libyan supply shortfalls and unsubstantiated trade rumours Libyan leader Muammar Gaddafi had been shot. A US official said the US government has no reason to believe that the Libyan leader is dead. However, the rumour swept through oil markets and sent prices tumbling more than $2 a barrel in late Thursday trade.

Oil markets had earlier eased on news top Opec exporter Saudi Arabia was in talks with European refiners affected by the disruption. Traders have been on edge on concerns the unrest sweeping across Northern Africa could spread to other oil-producing countries.

Brent crude hit a high of $119.79 early, dropped down to $110.51 in late trade. At 3:05 pm EST (2005 GMT), Brent traded up 23 cents to $111.48 a barrel. US crude settled down 82 cents at $97.28 a barrel, after touching $103.41, the highest since September 2008.

Copyright Reuters, 2011