Brent oil surged as much as 7.7% to its highest price since August 2008 on Thursday on concern the bloody unrest that has cut more than a quarter of OPEC-member Libya's output could spread to other producers including top exporter Saudi Arabia.
Disruption stemming from the revolt in the world's No 12 exporter Libya has cut at least 400,000 barrels per day (bpd) of the country's 1.6 million bpd output, according to Reuters calculations.
Brent crude on Thursday spiked nearly USD 7 in the 90 minutes to 0800 GMT. It rallied as much as USD 8.54 a barrel to a peak of USD 119.79, trimming gains to trade up USD 6.00 at USD 117.25 by 0902 GMT. The contract has risen nearly 14% in four days.
Reuters market analyst Wang Tao says technical charts show Brent could be on course for a rise to USD 158 per barrel in 2011, well above its 2008 high of USD 147.50, while he expects US crude to touch USD 159 per barrel.
US crude for April delivery rose as high as USD 103.41, the highest September 2009. It traded up USD 4.31 at USD 102.41 at 0903 GMT.
The cuts from Libya represent the first disruption to supply as a direct result of protests that have swept through the oil producing regions of North Africa and the Middle East.
The concern for oil markets is how unrest might affect Saudi Arabia, which not only pumps around 10% of the world's oil but is also the only holder of significant spare crude production capacity that could be used to plug supply outages such as those being suffered by Libya.
"The situation in the Middle East is causing a lot of uncertainty in the market now, the risk of disruption to major producers in the region is what every investor is watching now," said Ken Hasegawa, a commodity derivatives manager at Newedge brokerage in Tokyo.
Without Saudi Arabia's 4 million bpd of spare capacity, there is little margin in the global oil supply system to deal with output disruption.
To date, the kingdom has escaped the popular protests against poverty, corruption and oppression that have raged across the Arab world, toppling the long-time leaders of Egypt and Tunisia and spreading as far as Saudi neighbour Bahrain.
Goldman Sachs said on Thursday oil markets were driven by fear of contagion to other producing nations and that another disruption could create severe oil shortages and require demand rationing.
"The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of OPEC's spare capacity," Jeffrey Currie said in a research note.
Saudi King Abdullah returned home on Wednesday from a three-month medical absence and unveiled benefits for Saudis worth some USD 37 billion in an apparent bid to insulate the world's top oil exporter from the protests across the Arab world.
Hundreds of people on Wednesday backed a Facebook page campaigning for a "day of rage" across the kingdom on March 11 to demand an elected ruler, greater freedom for women and the release of political prisoners.
"You can't ignore it, if you have trouble in Bahrain, there is a fear that this could spread into Saudi Arabia," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.
"No one expected Egypt's (Hosni) Mubarak to go, now anything is possible and that is why everyone is watching this closely."
Eastern areas holding much of Libya's oil have slipped from the control of Muammar Gaddafi, who has unleashed a bloody crackdown on protesters to keep his 41-year grip on power. The death toll may already be as high as 1,000 people, Italy's Foreign Minister said.
President Barack Obama broke his silence on Libya late on Wednesday, calling for international unity to end the violence but did not call for Gaddafi to go.
Staff from international oil firms are among the many leaving the country as governments around the world scramble to send planes and ships to evacuate their citizens from the North African producer.
Top Chinese oil and gas company China National Petroleum Corp (CNPC) said on Thursday it had evacuated some of its employees.
The unrest has added as much as USD 20 a barrel to oil as investors price in the potential for further disruptions, but for now supply was plentiful, Nunan said.
"There is about a USD 10 to USD 20 risk premium on oil prices at the moment, but fundamentals show that the market is still well supplied for now even with disruptions to production in Libya," he said.
Demand from China's fast growing economy also supported prices. China cut diesel exports in January by 79% on the year and raised fuel oil imports as it worked to meet a supply crunch caused by nationwide power restrictions.
Weekly US oil inventory data from industry group API showed on Wednesday that petroleum stocks had risen 163,000 barrels last week, after analysts polled by Reuters had forecast a bigger rise of 1.2 million barrels.
Distillate inventories fell a less-than-expected 534,000 barrels and gasoline supplies fell 1.6 million barrels, API data showed, bucking analyst expectations for a rise.
The US Energy Information Administration's weekly inventory figures are due to be released later today.
The spread between Brent and US crude widened to USD 15.66 at 0803 GMT, wider than the USD 13.28 close on Wednesday.