U.S. crude rose more than $2 to a 30-month high above $106 on Monday as civil war brewed in Libya, while investors kept a close eye on top exporter Saudi Arabia, home to most of OPEC's spare capacity and where clerics at the weekend forbid protests.
April U.S. crude rose as much as $2.02 to $106.44 a barrel, the highest price since September 2008, adding to concerns that high energy costs may derail the global economic recovery. It was up $1.89 at $106.31 at 0657 GMT.
This year's 16% rally in U.S. crude has prompted the Obama administration to consider releasing emergency oil stockpiles as policymakers seek ways to contain a negative spillover to the world's biggest economy.
"The concern is that with what we are seeing in Libya, it's purely fear driving the market," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.
ICE Brent crude for April gained $1.31 to $117.28, still more than $2 away from the contract's peak this year at $119.79 on Feb. 24. Its premium over U.S. benchmark West Texas Intermediate (WTI) has narrowed to about $11 from more than $15 last week.
Qatar's Energy Minister said on Monday OPEC was evaluating the situation in the oil market and the need to convene for an impromptu meeting, but added that there was no shortage of supply in the market.
Saudi Arabia has already pledged to fill any supply gap caused by the disruption of exports from Libya. The kingdom is pumping around 9 million bpd and has spare capacity of around 3.5 million bpd, a senior Saudi source told Reuters last week.
But Saudi Shi'ites last week staged small demonstrations in the Eastern Province, which holds much of the kingdom's oil wealth, leading clerics to ban protests.
"Each time the price moves up a little, people are forced into the market. Once it's feeding itself, it will continue to rise," Barratt said, adding $120 may be the peak without further supply disruptions.
Saudi security forces have detained at least 22 minority Shi'ites who protested last week against discrimination, activists said on Sunday, as the kingdom tried to keep the wave of Arab unrest outside its borders.
The kingdom's Eastern Province is near Bahrain, the scene of protests in recent weeks by majority Shi'ites against their Sunni rulers. More than 17,000 people backed a call on Facebook to hold two demonstrations in Saudi Arabia this month, the first one this coming Friday.
U.S. unemployment in the U.S. fell to near a two-year low in February, jobs data showed on Friday, but a surge of 23% in Brent prices this year threatens that positive turnaround. Oil prices may slip back to more "realistic" levels around $80 later this year, Barratt said.
High oil prices also threaten Asian economies. "At $120 a barrel, we estimate oil prices to shave off 1.5 percentage point from baseline growth" for Asia excluding Japan, RBS economists Sanjay Mathur and Erik Lueth said.
White House Chief of Staff William Daley said on Sunday the U.S. was considering tapping into the strategic petroleum reserve (SPR) as a way to lower prices, adding that "a bunch of factors have to be looked at," not just prices.
One of those factors is coordinating with the other 27 member countries of the International Energy Agency (IEA), which hold emergency stockpiles equivalent to at least 90 days of net oil imports, counting both government and industry stocks.
Current levels of government-owned supplies are equivalent to about 1,000 times Libya's pre-crisis daily crude output of 1.6 million bpd. The proportion of crude and products in storage varies across countries.
As the world's biggest oil consumer, the United States holds the largest emergency oil stockpiles in the SPR. Four storage sites in Texas and Louisiana hold a total of 726.6 million barrels of crude, enough to cover the nation's needs for more than a month.
Hurricanes Katrina and Rita in 2005, which at the peak disrupted 1.5 million bpd of U.S. oil output, triggered the biggest release of emergency stockpiles yet because the storms also idled refineries in the U.S. Gulf coast, virtually paralyzing the supply chain of the world's top consumer.
After Katrina the IEA made available 60 million barrels through a combination of emergency stocks, increased U.S. crude output and demand restraint.
Japan and South Korea, among the world's top 5 crude oil importers, have no immediate plans to release oil from strategic reserves to fill any shortfall left by the unrest in Libya, industry and government officials said.
News about the potential use of U.S. emergency oil stocks failed to dampen prices as investors remained jittery that the unrest in oil-producing nations of the Mideast Gulf may escalate and affect crude production there.
"It doesn't matter what they say because it's fear," Barratt said, referring to the Obama administration's possible use of the SPR. "We have ample supplies after OPEC, led by Saudi Arabia, stepped in."
In Libya, troops loyal to Gaddafi launched counter-offensives against rebel-held towns on Sunday backed by tanks, artillery, warplanes and helicopters, attacking positions near the rebel-controlled oil port of Ras Lanuf, 660 km (410 miles) east of the capital.
Gaddafi has lost control to rebels of most of the country's east, the main oil producing region in the OPEC member nation. Many oil facilities are idle or working at well below capacity.
Oil sources said refining operations and exports of crude by firms operating in the town, including units or ventures with the state-owned National Oil Corp (NOC), had ground to a halt over previous days because of the unrest and supply problems.
Rebels now hold an area west of Ras Lanuf that includes al-Sidrah, the last major oil terminal town in the east of the country. That would mean rebels now have all the main oil terminals in the east of Libya in their hands.
Libya usually produces 1.6 million bpd, but output has been slashed by as much as 1 million bpd, according to the IEA.