Oil prices turned positive on Tuesday as Gaddafi's troops halted a rebel advance, raising doubts among investors over how quickly the conflict in OPEC member Libya could be resolved.
Expectations of a relatively swift restoration of Libyan oil to the market had been building after the rebels mounted a two-day charge westwards, retaking oil towns, but momentum stalled on Tuesday as they hit fierce opposition around Nawfaliyah, 120km (75 miles) east of Sirte.
Government forces in the west launched fresh attacks on rebels in Misrata, but U.S. ambassador to the United Nations Susan Rice said the Obama administration had not ruled out arming Libya's rebels.
Brent crude for May delivery was 14 cents higher at $114.94 by 1430 GMT, after earlier falling more than a dollar. U.S. light crude was 11 cents up at $104.09.
In Japan, plutonium was found in soil at the Fuskushima nuclear complex, raising concerns it had breached the containment system of reactor No. 3, undermining hopes the workers were getting the plant under control.
Analysts said Japan's lack of progress in containing the nuclear crisis was likely to delay the world's third-largest oil user's return to full industrial strength, but the downside for oil prices could be limited by unrest in the Middle East.
We have two factors that are countervailing, said Harry Tchilinguirian, analyst at BNP Paribas.
There is a risk premium in the Middle East built in on risk of further contagion. On the other hand we have the fact Japan is a major component of the global supply chain, so the potential for a price correction in the second quarter remains.
Yemeni protesters demanded the imminent removal of President Ali Abdullah Saleh on Tuesday and blamed him for violence that has raised U.S. fears of chaos that could be exploited by militant groups including al Qaeda.
Volume for U.S. crude fell on Monday to the lowest this year, with trade limited in part, analysts said, by concern about the prognosis for Japan.
The dollar strengthened after St. Louis Federal Reserve President James Bullard warned against keeping U.S. monetary policy too loose for too long. Tighter central bank policy is expected to lower liquidity in financial markets and possibly curb economic growth and oil demand.
To offset Libyan disruption, Saudi Arabia has increased output to around 9 million barrels per day (bpd), around one million bpd more than its OPEC target, which analysts have said has put a strain on its spare capacity.
As the kingdom scrambled to maintain its 12.5 million bpd oil capacity, specialist energy bank Simmons & Co said on Monday Saudi Arabia planned to expand its drilling rig count by 28 percent.
It's probably more bullish than bearish, said Amrita Sen, analyst at Barclays Capital. The flip side is there is less spare capacity.
Inventories in the United States have been particularly ample, which has helped to keep the price of U.S. crude around $10 below that of European Brent.
Ahead of weekly inventory data for release on Tuesday and Wednesday, a preliminary Reuters survey of analysts found crude oil stocks probably rose in the United States last week in line with seasonal trends.
Higher imports were expected to meet demand as refiners brought units back from maintenance, analysts said.
(Additional reporting by Barabara Lewis, Florence Tan, Alejandro Barbajosa, Randy Fabi)