LONDON, March 17 - Oil was up over $1 on Thursday as tensions in Saudi Arabia and Bahrain fueled fears of further supply disruption while investors weighed the impact on energy demand from quake-hit Japan.
Brent crude for May, the front-month contract after April expired on Wednesday, was up $1.53 to $112.13 a barrel at 0903 GMT (5:03 a.m. ET), after earlier falling as much as 1 percent to $109.45.
U.S. crude rallied over $1 as London traders arrived at their desks, reaching an intraday high of $99.20 before slipping back to $99.07 a barrel.
The market is seeing risks from the supply side and the demand side, and has to decide which is weighing more, said Barbara Lambrecht, a commodity analyst at Commerzbank. It is looking for orientation -- I think we can expect more volatility.
Prices had slid about 4 percent since Japan's earthquake and tsunami six days ago, touching a three-week low of $107.35 on Wednesday. But increased tensions in the Middle East have helped prices rebound.
In Bahrain at least six opposition leaders have been arrested, a day after a crackdown on protests by the Shi'ite Muslim majority.
Bahraini forces used tanks and helicopters to drive protesters off the streets and clear a camp that had become a symbol of their demand for more democratic rights in the Sunni-ruled kingdom.
Bahrain lies less than 100 kms from the hub of the Saudi oil industry at Dhahran, including the world's largest oil fields, oil terminal and processing plant.
The demonstrations in Bahrain are a potential threat to Saudi Arabia, said Thorbjorn Bak Jensen, oil market analyst at Global Risk Management.
Saudi Shi'ites marched in the kingdom's oil-producing east on Wednesday, demanding the release of prisoners and voicing support for Shi'ites in nearby Bahrain, an activist and witnesses said.
Anything that causes unrest in Saudi Arabia or causes a supply side event in the Middle East will cause a sharp rebound in prices, National Australia Bank commodity economist Ben Westmore said.
The market is also focused on the quake-crippled Fukushima nuclear plant in Japan where operators dumped water on overheating reactors to try to avert a meltdown.
Although the Japanese reconstruction effort will be energy-intensive, manufacturing shutdowns such as that of Toshiba's LCD assembly line may reduce the immediate demand for electricity.
Any lengthy disruptions to regional production networks could spill over into global supply chains and impact economic growth, investors fear.
There is so much uncertainty in Japan and its ability to drive economic recovery that it's something that is casting a shadow on the outlook for global growth, said Westmore.
Bak Jensen said risk aversion had prompted the big sell-off earlier in the week, but when Japan regains control of its nuclear reactors, oil prices should pick up again.
Refined products such as fuel oil and gasoil are trading at premiums to Brent and that should put upward pressure on Brent, he said.
In Libya, government soldiers battled rebels on the road to the insurgent stronghold of Benghazi as the United States raised the possibility of air strikes to stop Muammar Gaddafi's forces.
OPEC members including Saudi Arabia have increased output partly to compensate for the loss of as much as two-thirds of Libyan supplies, at the same time eroding spare capacity.
(Additional reporting by Alejandro Barbajosa; editing by Jason Neely)