Oil rose by more than $2 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 $2.13 to $112.73 a barrel at 1120 GMT. Overnight it fell as much as 1 percent to $109.45 but then rebounded Thursday morning to an intraday high of $113.12.
U.S. crude rallied more than $1, reaching an intraday high of $99.86 before slipping back to $99.71 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.
The focus is back on continuing unrest in the Middle East and what will be a lot of disruption in Libya for a long time, said Christopher Bellew, an oil trader at Bache Commodities.
The risk is more to the upside -- there was a lot of long liquidation on that sharp sell off at the beginning of the week so we will work our way a bit higher probably.
In Bahrain at least six opposition leaders have been arrested, a day after a crackdown on protests by the Shi'ite Muslim majority. A United Nations human rights official urged Bahrain to rein in its forces.
State-owned Bahrain Petroleum Co (BAPCO) has partly shutdown production due to staff shortages caused by the protests, trade sources said.
Bahrain lies less than 100 kms from the hub of the Saudi oil industry at Dhahran, including the world's largest oilfields, 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.
JAPAN, LIBYA DISRUPTIONS
The market is also focused on the quake-crippled Fukushima nuclear plant in Japan where emergency crews are battling to cool an overheating nuclear plant in efforts 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.
With the Japanese crisis we are starting to enter an area of systemic risk where assets can see extreme fluctuations without necessarily a fundamental justification, Olivier Jakob, oil analyst at Petromatrix, said in a note.
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. The United Nations Security Council meets later on Thursday to consider its response to the escalating violence in Libya, with a vote planned on the no-fly zone.
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.
Commerzbank's Lambrecht noted even if the Gaddafi regime quickly regains control of oilfields and exporting facilities, the sites are partly destroyed and market sanctions expected.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by James Jukwey)