Oil surged more than 7.5 percent to its highest since August 2008 on Thursday on concern that uprisings in Libya could spread to other major oil producers in the Middle East, including Saudi Arabia.
Brent crude oil for April spiked up $8.54 a barrel to a peak of $119.79 before easing to around $114 by 11:15 a.m. EST. U.S. crude futures for April rose as high as $103.41, the highest September 2009. They were up $1.00 at $99.10 at 11:15 a.m. EST.
Unrest in the world's 12th-biggest exporter has cut at least 400,000 barrels per day (bpd) from Libya's 1.6 million bpd output, according to Reuters calculations.
ENI Chief Executive Paolo Scaroni said Libyan output had fallen much more dramatically, estimating it was putting 1.2 million barrels per day less into the market.
The Financial Times quoted an unnamed official as saying Saudi Arabia was in active talks with European refiners who may be hit by a disruption in Libyan exports.
That would be the clearest sign yet that OPEC's biggest exporter is ready to respond to the cut in Libyan output.
The kingdom had asked refiners what quantity and what quality of oil they want, the FT quoted the senior Saudi oil official saying on condition of anonymity.
Goldman Sachs said the spread of unrest to another producing country could bring oil shortages and require demand rationing.
The market cannot accommodate another disruption, in our view, analyst Jeffrey Currie said in a research note.
Also supporting oil prices were figures from the U.S. Energy Information Administration (EIA) showing a lower-than-expected build in crude inventories and hefty drawdowns in gasoline and distillate stocks last week.
EYES ON SAUDI
Major banks joined the chorus of calls on Thursday for OPEC to act quickly on fears the strong oil prices could derail the fragile economic recovery.
Barclays Capital and Citi said it saw no downward pressure on prices until more oil comes to the market.
Unless we see an explicit move from ... producer countries, i.e. Saudi Arabia, I don't think there is necessarily going to be any downward pressure on prices, said BarCap analyst Amrita Sen.
Eugen Weinberg, Commerzbank's head of commodities research, said the situation called for some extraordinary measures.
This is an opportunity for OPEC to prove whether they are really able to (step) into this production gap, he said.
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 cuts in Libyan oil output 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 percent of the world's oil but is also the only holder of significant spare crude production capacity that can be used to plug outages.
The FT report said Saudi Arabia was waiting for a response from European customers before making a decision on whether or not to increase output. It said options included pumping more oil through an East-West pipeline or boosting shipments to Asia in order to free up West African crude for Europe.
Without Saudi Arabia's 4 million bpd of spare capacity, there is little margin in the global oil supply system.
To date, Saudi Arabia has escaped popular protests that have raged across the Arab world, toppling the leaders of Egypt and Tunisia and spreading as far as Saudi neighbor Bahrain.
Saudi King Abdullah has unveiled benefits for Saudis worth $37 billion in an apparent bid to insulate the oil exporter from protests in the region. However, hundreds of people have backed a Facebook page campaigning for a 'day of rage' across the kingdom on March 11 to demand reforms and greater democracy.
U.S. crude oil inventories rose less than expected and refined product stocks fell last week as the United States imported less crude, according to a report from the IEA.
Domestic crude stocks rose 822,000 barrels to 346.7 million barrels in the week to February 18, the report showed, compared with expectations for a 1.2 million barrel build in a Reuters poll of analysts.
(Additional reporting by Nia Williams, Emma Farge, Claire Milhench and Dmitry Zhdannikov in London; Editing by Jason Neely and Alison Birrane)