Bank of America Merrill Lynch said on Tuesday oil may correct sharply lower later this year if Libya starts producing again and the dollar soars, taking a polar view from peers which expect the oil rally to accelerate.

Goldman Sachs, which in April rightly predicted last week's major correction in oil, has said it could not rule out oil prices will correct further in the short-term but would then rebound above recent highs due to tight global supplies.

JP Morgan, also said oil could rise above $130 a barrel in the third quarter and Barclays Capital and Deutsche Bank said the general trend should now be only higher.

Merrill said however it saw a flurry of factors that could push oil to below $100 a barrel in the months to come, including signs of oil demand destruction and the rise in credit risks, the end of a bond buying programme in the United States and debt restructuring in the European periphery.

'The potential drop in crude oil prices could be more pronounced if Libyan supplies happen to come back on line in second half of 2011 and unexpected US fiscal tightening translates into a much stronger dollar,' it said, adding that Brent will average $94 a barrel in Q4 2011.

But it said that with limited oil supplies in the short-term, Brent could trade close to an average of $122 a barrel this quarter.

Merrill said that following a sharp jump in volatility and a large change in the structure of the oil options market, the best trade strategy was via selling short-dated out-of-the-money Brent puts. – Reuters