Brent oil prices will soften in the second half of this year to around $110 a barrel on worries that government debt problems and sluggish growth will cap demand, which is already dented by high energy prices, a Reuters poll showed.

The majority of 31 analysts polled by Reuters expect Brent prices to come down significantly from their current levels of above $118 a barrel.

'There are enough sovereign debt issues around to provide a source of significant headline risk for a while to come,' Barclays analyst Amrita Sen said in a note.

Societe Generale analyst Michael Wittner said that economic concerns and sovereign debt issues in Europe and the United States would continue to drive swings in risk appetite in both directions.

'The rebound in sentiment on the second bailout of Greece may have already happened, and it is unclear how much the US debt ceiling theatrics are weighing on the oil markets,' he said in a note.

'While macro weakness first impacts risk appetite, sooner or later it starts to affect oil demand, as we can see in the US'

Brent fell as low as $105.99 a barrel a month ago after a surprise release of emergency oil stocks by consuming nations   but then quickly recovered as analysts questioned the efficiency of the move.

Despite assurances by the International Energy Agency that it had no plans for a second release, Barclays analysts said the US election next year could galvanise the agency or Washington to act again, dragging prices lower.

'While some of the immediate dampening force on prices has lessened, we suspect that neither sovereign debt nor the IEA have disappeared as significant factors for the quarter as a whole and are likely to keep prices largely range-bound this quarter,' Amrita Sen from Barclays said.

'If prices break too far to the upside, we believe that the IEA, or at the very least the US and its most immediate allies, will be back.”

Recent firmness in prices could also endanger the faltering economic recovery, dampening demand.

'Very high oil prices are taking their toll on oil demand and economic growth. As data showing weak balances is starting to emerge, we think that oil prices should start to decline in the coming weeks,' Credit Agricole CIB analyst Christophe Barret said.

The Libya factor

On the political front, the premium derived from disruption in Libya is expected to ebb away in the medium term, with a resolution more likely the longer the conflict stretches.

'We continue to expect the price of a barrel of Brent, currently $119, to fall back to $85 by the end of the year,' Capital Economics said. That was the lowest estimate in the poll for the fourth quarter this year.

'Another downside risk, which is perhaps not receiving enough attention, is that the premium for unrest in the Middle East could be about to drop sharply'.

JP Morgan analysts said the probability of a change of government in the country would increase the longer the fighting goes on.

'Such a shift is increasingly likely in the second half of 2011, but given the uncertainty on both the legal and the logistical side and the need to rapidly return supplies to the domestic market to satisfy a restive population, we still feel comfortable with our assumption that exports return gradually over the course of 2012,' the analysts wrote in a note. – Reuters