Oil steadied on Friday, with Brent crude close to $116, but analysts saw the risk of higher prices as unrest bubbled across the Middle East and western powers kept up a military campaign in Libya.
A massive Day of Departure street protest against President Ali Abdullah Saleh began in Yemen on Friday, and protests erupted in cities in Syria, where at least 37 have died following demonstrations against the government of President Bashar al-Assad.
Rebel gunners fought artillery duels with Muammar Gaddafi's forces in eastern Libya, and Western warplanes struck at armor used by the government to crush the revolt.
Brent crude for May rose 10 cents to $115.82 a barrel by 1415 GMT, about $4 under a 2-1/2-year high just below $120 reached a month ago. U.S. crude fell 40 cents to $105.20.
Libyan oil exports of about 1.3 million barrels per day (bpd) have virtually vanished, eroding global spare capacity as Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries have increased production.
This has heightened talk of the risk of higher prices as unrest continues across the Middle East and North Africa, which together produces more than a third of the world's oil.
My gut feeling is that the oil market is more likely to go up than down, said Tony Machacek, a broker at Bache Commodities in London. There are so many unknowns that could hit supply.
Machacek said the ICE Brent options market had a significant call skew, indicating that generally people think there is more risk of movement to the upside.
Reflecting this view, J.P. Morgan analysts headed by Lawrence Eagles on Friday raised their forecast for Brent in the second quarter to $118 from $105, saying dips in volatility, like the one that we saw this week, appear to offer good entry points for hedging strategies.
So long as ongoing problems in the Middle East continue to elevate risks of a further supply disruption, there is a strong likelihood of a price spike in the second quarter as the market demands additional oil to meet summer demand, J.P. Morgan said.
In Yemen, the opposition has stepped up efforts to remove President Saleh, dismissing his offer to stand down after an election at the end of the year.
Western countries are alarmed that al Qaeda militants entrenched in the Arabian Peninsula country could exploit any chaos arising from a messy transition of power if Saleh, a pivotal U.S. and Saudi ally fighting for his political life, finally steps down after 32 years in office.
In Bahrain, a small island less than 100 km from the hub of the Saudi Arabian oil industry, thousands turned out for a sermon of a major Shi'ite cleric on Friday ahead of Day of Rage protests planned despite a ban imposed under martial law.
J.P. Morgan said extra OPEC supplies were needed in the run-up to northern hemisphere summer demand, before the producer group's next meeting in June.
By then, it will be too late to prevent higher prices and could extend what we see as a mid-quarter blip to a much more serious and destabilizing price surge that could distort stock-holding behavior and economic growth, the bank said.
The volatile mix of headlines from the Middle East over the past few weeks has taken its toll on trading volumes as investors await the next turn of events.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by Jane Baird)