The Libyan state oil company NOC said it will export almost 1.4m barrels a day (b/d) next month as key oil fields come back on stream.
The announcement came after Saudi Arabia said it had boosted output to a near record level of 9.87m b/d in January and stood ready to cover any shortfall as European sanctions against Iran bite deeper.
"I want to assure you that there is no shortage of supply in the market," said Saudi oil minister Ali al-Naimi. "Oil prices today are unjustifiable on a supply and demand basis. We really don’t understand why the prices are behaving the way they are."
Brent crude for April slipped more than a dollar to $123.55 a barrel in London, as traders discounted an immediate supply crunch.
It recovered later to almost $126 after France and Germany said they opposed tapping strategic petroleum reserves for now. Despite the soothing words from Mid-East suppliers, the global oil market remains stretched with OECD inventories lower than during the Arab Spring last year. Most analysts believe Saudi spare capacity is below the safety threshold of 2m b/dm, though Mr al-Naimi said the Kingdom still has a 2.5m cushion.
Barclays Capital said it remained "sceptical" about the ability of Saudi Arabia to boost output much beyond 1m b/d quickly and on a sustained basis. It also doubted that Libya will come close to its new target given the depletion rate of aging oil fields and the country's "political backdrop".
Christine Lagarde, the head of the International Monetary Fund, has warned over recent days that high oil prices risk choking global recovery before a fresh cycle of growth is safely underway.
She told a forum in Delhi that the world outlook is not as "grim or dire" as it had appeared over the winter but dangers abound. "A sudden and brutal rise in the price would have serious consequences on the global economy. If there was for instance a major shortage of export of oil from Iran, it will certainly drive prices up, at least for a period of time. We believe that it will be in the range of 20pc to 30pc," she said.
Such a move would push Brent to uncharted levels above $160.
The warning came as the New York Times reported that a simulation exercise by the US military had revealed the acute dangers of a an Israeli strike on Iran. Pentagon officials that events could easily fly out of control, leading to a regional wider war.
Bank of America said energy costs as a share of global GDP are already near 9pc, the level that has typically triggered world recessions in the past. The bank said a sustained rise in Brent crude above $130 would smother growth in the West.
Separately, China has taken advantage of falling inflation to raise pump prices for petrol and diesel by 6pc, a move aimed at enhancing fuel efficiency as the country adds 125m new cars over the next five years.
China has become the key driver in global crude demand. It has increased imports by 2m b/d since the Great Recession, more or less offsetting the fall in consumption in the West.
The rise in fuel duty is unlikely to dampen China's appetite quickly - and may even lead to a short-term jump in imports as higher profit margins for refiners drive demand - but it comes as the latest reminder that the China-driven commodity boom is cooling.
Mining group BHP Billiton said on Tuesday that China's long-term steel demand has flattened, with major implications for iron ore producers in Australia and Brazil.