Oil prices rose to fresh 2-1/2 year highs on Tuesday, with Brent crude topping $122 a barrel as unrest in oil exporting countries in the Middle East and Africa outweighed China's fourth interest rate hike since October.
The prospect of a stalemate prolonging the loss of 1.3 million bpd of exports from Libya loomed amid unsuccessful efforts to end the war and clashes over the oil town of Brega intensified.
Brent crude for May was 84 cents up at $121.90 barrel at 1452 GMT after closing at $121.06 a barrel on Monday, the highest settlement since August 1, 2008.
U.S. crude fell 42 cents to $108.05 a barrel after settling at $107.78 on Monday, the highest since September 22, 2008.
The path of least resistance remains higher on account of both Middle-Eastern headlines, as well as the watch-and-wait status coming from Nigeria, said Edward Meir at MF Global in a note.
The whole commodity complex seems to be on the boil again, with precious metals, many of the base metals, and some of the agriculturals, (like corn), all hitting record or recent highs.
The fourth Chinese interest rate increase since October briefly triggered a decline of around $1 a barrel in oil prices earlier in the session, but oil pared losses as bloodshed continued in Yemen and anger brewed in Nigeria over delayed elections.
The market doesn't seem that bothered about Chinese interests rates any more, which seems totally crazy to me, said David Morrison, a strategist at GFT.
Worries about oil supply turned to Nigeria after elections there were postponed by a week due to logistical problems, sparking fury among voters who were promised a break with a history of flawed and violent polls.
Nigerian militants have previously hit supplies of the country's oil, a sweet crude that has jumped to a premium as a result of the Libyan outages.
We have already lost good grades in Libya, and now the elections in Nigeria are providing further potential upside, said Rob Montefusco, an oil trader at Sucden Financial.
However, production was restarting in Gabon, which produces a similar grade of oil, after energy worker strikes completely cut off the country's near 240,000 bpd of output.
Total and Royal Dutch Shell , key producers in Gabon, both said they were working to restore normal production as soon as possible.
Saudi Arabia has raised supply and introduced lighter grades of oil to help fill in for missing Libyan output, but traders question how much more room for output increases remains.
Spare capacity is eroding and together with the geopolitical backdrop where Nigerian outages are very much on the cards with the upcoming elections, upward pressure on prices could well continue, said Amrita Sen, an analyst at Barclays Capital.
Former Saudi oil minister Sheikh Zaki Yamani told Reuters oil prices could leap to $200 to $300 a barrel if the kingdom is hit by serious political unrest.
The discount of U.S. crude futures to Brent widened to over $14 a barrel on Tuesday, expanding by over $3 a barrel since the start of trade this week, but remained distant from a record $17.12 a barrel spread at the start of March.
Weekly industry and government petroleum inventory reports are forecast to show a 1.4 million build in U.S. crude inventories, a 1.9 million barrel decline in gasoline stockpiles and a 200,000 barrel drop in distillates, according to a Reuters poll of analysts.
(Additional reporting by Seng Li Peng and Simon Webb in Singapore; editing by James Jukwey)