Oil rose more than $1 a barrel to over $112 on Friday as unrest in Libya sparked fears of supply shortages, despite assurances by top oil exporter Saudi Arabia that it would step in to fill any shortfall.
Unrest has cut a large chunk of Libya's output of 1.6 million barrels per day, prompting Saudi Arabia to launch talks with European companies that buy most of Libya's oil exports.
Brent crude for April delivery rose $1.31 to $112.67 a barrel by 12:23 a.m. ET. Prices briefly surged to a 2-1/2-year high of $119.79 on Thursday before settling at $111.36.
U.S. crude traded 44 cents higher at $97.72, after surging as high as $103.41 on Thursday, the highest since September 2008.
Now is not the time for producers to attempt verbal finesse, said analysts at Barclays Capital in a research note. It is better to visibly supply more oil now, and then pull it off the market swiftly if it later proves unnecessary.
Estimates varied on how much of Libya's production is down. The International Energy Agency estimated Libyan oil output to have been cut by 500,000 to 750,000 bpd due to the unrest, while Italian oil company ENI said as much as 1.2 million bpd may be down. Key Libyan oil terminals are under rebel control.
Saudi Arabia was in talks with European companies affected by the disruption in Libyan supply and was willing and able to plug any gaps in supply, senior Saudi sources said on Thursday.
The Saudi sources said the country was able to pump more of the kind of high-quality crude produced by Libya and it could be shipped quickly to Europe with the help of a pipeline that crosses the kingdom.
The kingdom has yet to make an official statement on the talks.
Oil markets fear the potential impact on top oil exporter Saudi Arabia of a wave of protests across the Middle East and North Africa that has toppled long-time leaders of Tunisia and Egypt.
Saudi Arabia is the only oil producer with significant spare capacity to meet global supply outages such as the reduction in the flow from Libya.
Anxiety and concerns about the people's revolt spreading to other parts of the Middle East and North Africa continue to support the markets, said Victor Shum, an analyst with energy consultancy Purvin & Gertz.
Prices fluctuated more than $10 in whipsaw trading on Thursday, the widest trading range since September 2008, as the market reacted to rapidly unfolding events in Libya. Volatility forced exchanges to hike trading margins sharply on Thursday, including the first U.S. increase in over two years.
When geopolitics in the Middle East are at play in the oil markets, all conventional bets on the direction of oil prices based on supply and demand fundamentals, or economic variables, are off, analysts at BNP Paribas said in a research note.
With a spike in oil prices threatening the global economic recovery, the IEA called on OPEC to draw on excess oil production capacity if required to counter Libyan supply losses.
U.S. President Barack Obama and Treasury Secretary Timothy Geithner sought on Thursday to quell fears that unrest in Libya would put oil prices on a longer term upward trajectory.
We actually think that we'll be able to ride out the Libya situation and it will stabilize, Obama told a group of corporate executives in reference to fuel prices.
Reuters market analyst Wang Tao said technical charts showed Brent would recover to $113 a barrel in the next day or two on a steady climb to as high as $158 this year.
The spread between Brent and U.S. crude widened to $14.97 a barrel from $14.50 on Thursday. U.S. oil has been weighed down by large stocks at the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange's contract.
(Reporting by Randy Fabi; Editing by Simon Webb)