NEW YORK ( TheStreet) -- Libyan unrest continues, and gasoline may average $4 in the U.S. this summer, but the Tuesday headline that mattered most, and sent oil prices lower, was the word from OPEC that it is leaning toward releasing more light, sweet crude to the market.

Kuwait's oil minister said on Tuesday that OPEC is in talks about boosting oil supplies, adding to previous commentary from Saudi Arabia that it can boost production if needed to make up for any global oil shortages.

"We are in consultations about a potential output increase but have not yet decided," Kuwait Oil Minister Sheikh Ahmad al-Abdullah Al-Sabah said at a press conference on Tuesday.

Brent crude was down 1.5% on Tuesday afternoon, or $1.66, recently trading under the $113 mark. WTI spot was down 0.5% and settled just above the $105 mark.

There is no current shortage in the oil market, and some OPEC hawks remained against boosting supply, however, traders read the Kuwaiti minister's comments as a reason to send oil prices down on Tuesday. Algerian and Iran officials made comments arguing against a supply boost.

"It's the promise of more oil from OPEC that helps. Some OPEC members can object, but the bottom line is if the Saudis say it's OK, that's the vote that counts, and I think the Saudis learned their lesson about prices getting out of hand in the 1970s, and just a few years ago, when prices went from $147 to $30. It kills them because of demand destruction," said Phil Flynn, senior market analyst with PFG Best. "Even the more hawkish OPEC members have to be worried about demand destruction, and you need to pump more oil to keep the game going," Flynn said.

In contrast to recent trading sessions, when fears of demand destruction sent equities into a tailspin, the major market indexes climbed on Tuesday, with the Dow Jones Industrial Average and S&P 500 both up in the range of 1%.

There is a key difference between Kuwait or Nigeria offering more light sweet crude oil, and Saudi Arabia making more heavier crude available, too. European refineries, by and large, are not equipped to process heavier crude efficiently and the PFG Best market analyst said this explained why the decline in Brent crude was steeper on Tuesday than the decline in WTI.

"Europeans covet the higher quality crude. Nigeria can replace the Brent and it's better than the heavier stuff that the Saudis can punch out and that's why the spread between Brent and WTI is coming in," Flynn said.

On Tuesday, the Department of Energy's Energy Information Administration told Americans to expect West Texas Intermediate spot oil prices to average $102 in 2011 and to expect a 25% chance that gasoline hits $4 this summer, but the message from the government was merely playing catch up to what the markets have been assuming for weeks already. The government is more or less acknowledging the truth of the situation that the higher oil prices have not been passed on to consumers.

Equities surged even with the government talking about $4 gas, and in the opinion of the PFG Best market strategist, all equities need is one piece of good news and "it's off to the races." On Tuesday it was the commentary from OPEC, even if not a formal announcement. "The market is telling you today that if oil prices just stabilize the markets will be OK, and equities can still rally. High oil prices are OK, but not much higher," Flynn said.

The decline in oil doesn't mean that volatility will decline or that a major correction in oil prices are to follow, though. Day to day, the Libya headline risk, and the broader Middle East geopolitical headline risks, remain. There were more reports on Tuesday that Moammar Gadhafi was negotiating for an exit from power, though fighting against rebel groups continued in Libya.

The PFG Best market analyst said that for investors with deep pockets, volatility is still high, but the oil prices trade is still skewed to the upside. "The Middle East could turn around over night and everything be hunky dory tomorrow and oil prices experience a major correction, but I don't see it happening," PFG Best's Flynn said.

"When it's Venezuela that's coming up with a peace plan, volatility defines the environment," the market strategist added, alluding to the headlines last week that Venezuelan president Huge Chavez was coordinating a peace effort in Libya, which momentarily led to a decline in oil prices.

Energy stocks that have benefited from rising oil prices sold off more heavily than the broad energy sector on Tuesday, with many of the U.S. independent oil and gas producers down by at least 2%, including Chesapeake Energy ( CHK - Get Report), Range Resources ( RRC - Get Report) and EOG Resources ( EOG - Get Report). Analysts expect that as the rising tide that lifted all boats in the energy sector slows, U.S.-based, gas heavy names in the space may see declines, especially with recent headlines about fracking continuing to weigh on natural gas producers.

As the spread between WTI and Brent crude narrowed, U.S. refiners that have benefitted from the cheaper WTI light sweet crude also continued to lose ground, led by Western Refining ( WNR), down 7% on Tuesday following a similar decline on Monday.

Holly Corporation ( HOC), Frontier Oil ( FTO), Tesoro Energy ( TSO) and Alon USA Energy ( ALJ), all refiner stocks which had spiked year-to-date by a range of 20% to 40%, declined on Tuesday by 4% on average.

-- Written by Eric Rosenbaum from New York.


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