Oil prices jumped on Wednesday due to escalating violence in the Middle East and worries about oil supply from the region but retreated later on fears Japan's nuclear crisis was spinning out of control.

Brent crude retreated after rising by more than $3 earlier in the session after the European Union Energy Commissioner said the situation at the troubled Japanese reactor was effectively out of control and potentially catastrophic.

In the coming hours there could be further catastrophic events, which could pose a threat to the lives of people on the island, Guenther Oettinger told the European Parliament.

Brent for April was up $2.21 at $110.73 a barrel by 1630 GMT, rebounding from a three-week low on Tuesday.

U.S. crude futures were up 95 cents at $98.13 a barrel around the same time, off highs of $99.6 a barrel.

The cooling systems did not work, and as a result we are somewhere between a disaster and a major disaster, Oettinger said.

UNREST SPREADS

Escalating violence in the Middle East redirected the focus of attention on the oil-producing region on Wednesday, supporting oil prices.

A crackdown on protesters in Bahrain, where Saudi troops have intervened, resulted in at least four deaths, according to hospital sources, while clashes intensified in the streets of Yemen, Syria and Algeria.

Iran also chimed in with President Mahmoud Ahmadinejad quoted by state television condemning Bahrain's crackdown on mainly Shi'ite protesters as unjustifiable.

Saudi is not happy about what is going on in Bahrain ... The situation in Bahrain is potentially destabilizing for Saudi Arabia, said David Morrison, a strategist at GFT.

Muammar Gaddafi's advance in Libya added to uncertainty on Wednesday, as traders speculated whether the West would take measures resulting in prolonged loss of Libyan oil supplies.

The question is, if the government is regaining power what should the West do - that is putting some geopolitical risk back in, said Rob Montefusco, an oil trader at Sucden Financial.

JAPAN CRISIS

Oil prices have yet to benefit from an expected increase in Japanese demand for gasoil and fuel oil for power generation to replace some of the nuclear capacity lost following Friday's earthquake and tsunami.

Reconstruction efforts and the increased need for non-nuclear fuel is forecast to boost Japanese oil burning by around 500,000 barrels per day, a report published by the JBC Energy Research Center showed.

But oil shipments to Japan so far have not been significantly affected, a top shipping industry group said on Wednesday.

It remains unclear whether the earthquake in Japan will ultimately result in an increase or decrease in oil demand, said Christopher Bellew from Bache Commodities.

U.S. crude oil futures gained after a larger-than-expected gasoline stockdraw reported by the U.S. Energy Information Administration (EIA) pulled gasoline inventories to the lowest level since the week to January 7.

But the build in crude oil stocks exceeded forecasts, with inventories rising by 1.75 million barrels according to the EIA report, compared to a 1.3 million-barrel gain expected by analysts.

(Additional reporting by Alejandro Barbajosa; editing by James Jukwey)

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