Brent crude rose more than $2 a barrel on Monday as concern persisted about security of supply from the Middle East and North Africa even after top exporter Saudi Arabia boosted supply to meet the shortfall caused by a cut in exports from Libya.
Violent revolt in Libya has shut down as much as three-quarters of its output, according to some estimates. As protests have intensified and spread through the Arab world, investors fear any impact on output from Saudi Arabia.
Brent crude rose by $2.18 to $114.32 a barrel by 11:37 p.m. ET. U.S. crude rose $1.68 at $99.57 a barrel.
Both benchmarks posted their highest weekly close in 2-1/2 years last week.
There is the continued threat that conflicts will spread in the region that produces a large amount of oil in the world, said Ben Westmore, a commodities economist at the National Australia Bank.
There's been a bit of a contagion already, he said.
The impact on oil supply would be severe if conflict were to spread to Iran, Kuwait and especially to Saudi Arabia, he said.
Saudi Arabia is the only producer with significant spare capacity that can be quickly started to deal with supply outages. Without access to that oil the world has little slack in the global supply system to deal with disruption.
The kingdom is using that capacity to plug the Libyan deficit and has boosted output to a level exceeding 9 million bpd, a senior industry source familiar with Saudi production told Reuters. That would be the highest since Saudi pumped around 8.3 million bpd in January, according to a Reuters survey, although some estimates are higher and one consultant pegged output last month 8.9 million bpd.
In Libya, armed rebels prepared for a counter-attack as the country's leader Muammar Gaddafi defied calls to quit in the hardest-fought of the Arab world's wave of uprisings so far.
On Sunday, police crushed protest in non-OPEC oil exporter Oman following a wave of pro-democracy protests across the Arab world.
Oman is the ninth largest producer in the Middle East and North Africa, just after Libya, with a production of 865,000 bpd, according to JPMorgan.
The market is definitely bracing for the worst as it remained unclear when the situation in Libya would stabilize, Westmore said.
JPMorgan increased late on Friday its 2011 Brent oil forecast to $108 a barrel, up from the previous $95, on tighter supply after Libyan output losses.
It also raised its 2011 average forecast for WTI crude by 3.2 percent to $96 a barrel.
The new 2011 price forecast maps a projected outcome within a range of scenarios that could encompass the oil market over the next 12 months - ranging from a rapid normalization of geopolitical risk to the loss of output in a major oil producer, JPMorgan said in a report on Friday.
Following spikes in oil prices last week, the International Energy Agency has called on OPEC to draw on excess oil production capacity if required while adding that it is also ready to release emergency stocks when necessary.
But the response time meant that extra supplies would lag disruption, prompting volatility and near-term price spikes, Westmore said.
Iran's Oil Minister urged Saudi Arabia on Sunday to refrain from taking a hasty decision on increasing its oil production after the popular uprising in Libya, the official IRNA news agency reported.
Traders were looking ahead to manufacturing data to be released from the U.S. and China on Tuesday, Westmore said.
(Editing by Ed Lane)