The tense situation in Libya right now, where anti-government protesters have turned into rebels, holding many of the key cities in the easter part of the country were joined by rebels in the west of the country, putting Libya's embattled  President Gadhafi in control of the capital - Tripoli - but not much else. Seems that while an end game is playing out for the regime, the strong use of violence within the capital means that removing the leader will be a bloody undertaking.

From Wall Street Journal: Gadhafi Blames al Qaeda; Rebels Promise Offensive

Despite forcing protesters from the streets of Tripoli, the violence that has flared across towns in western Libya cut away at Col. Gadhafi's last remaining stronghold-and suggested his control over territory outside the capital was slipping fast.

Until now Libya's rebellion has focused mainly in the east of the country, where whole parts of the army have defected to the opposition. But the fighting in al-Zawiya and other western coastal towns pinions the longtime strongman between enemies on both sides.

The uncertainty there has had a very strong impact on oil prices as the futures for April delivery on the NYMEX tested the $100 level. It rose as high as $103.41 a barrel in overnight electronic trading but eased to $99.25 during floor trading. Brent crude for April deliver was trading up almost $4 testing $115 a barrel.

From MarketWatch: Oil Pares Gains After Topping $100

While the initial rally was triggered by the Libyan crisis, there is a growing understanding that [Libya's] production will be hampered for a long time to come. Furthermore, the seriousness of ongoing regional contagion risks was also underscored when Saudi Arabia's King Abdullah returned home from his convalescence and announced a $36 billion aid package, analysts at J. P. Morgan said in a note to clients.

Saudi Arabia's aid package, which included interest-free home loans and a pay raise for state employees, is seen as an effort to quell potential unrest in the wake of uprisings across the Middle East and North Africa.

These high oil prices will weigh on the global recovery as it will feed through to higher costs for gasoline - something that will eat into consumer spending. It can also increase the pressures of import inflation for many regions (Such as Asia) grappling with higher prices.

In currency markets the ramifications was for traders to flock to safe haven harbors like the Swiss Franc and Japanese Yen which performed very strongly against the majors - EUR, GBP, USD.

Now, the concern about these higher oil prices will feed through to lower expectations around growth which can cause further risk aversion. However, news that OPEC may try and increase production to make up for any shortfalls from Libya will be taken as a welcome sign. However, markets will also be looking for any further unrest erupting especially in a major oil producer like Saudi Arabia.

Therefore it would be important to ask how much of this response can be reversed if we do have some developments that cap the recent surge in oil prices. If we see the opposite, continually higher oil, that will turn currency markets decidedly risk-off and it adds a wrench into the current global macro-economic picture.