Brent crude oil surged as much as US$5 on Tuesday and posted its highest closing price in 2-1/2 years, as protests across North Africa and the Middle East stirred concerns about supplies from top Gulf OPEC producers.
News of a detained Shi-ite cleric in Saudi Arabia and clashes in Iran triggered the rally, and gains accelerated as traders worried that the world's biggest crude exporters could be hit by unrest like that which has halved Libya's oil production.
Brent crude futures for April rose $3.62 to settle at $115.42 a barrel, the highest finish since Aug. 27, 2008. U.S. crude rose $2.66 to settle at $99.63 a barrel, its highest settlement since 30 September 2008.
Brent extended gains in post-settlement trade, rising at one point by more than $5 to a high of $116.76 following U.S. industry data showing an unexpected decline in weekly U.S. crude inventories and a shocking 4.9 million barrel drop in gasoline stocks.
In Libya, where Muammar Gaddafi remained defiant in the face of increasing international pressure and rebel offensives, the top oil official told Reuters the country's 1.6 million barrels per day (bpd) of production was halved although oil installations were undamaged.
The United States warned that the OPEC member faced the danger of civil war if Gaddafi refused to quit. Many analysts have warned it could be months bofore production is restored, oil traders were beginning to shift their focus to even larger risks in the Gulf.
Further rumblings are detected in Saudi and Iran.
Human rights activists told Reuters Saudi authorities had detained a Shi'ite cleric, fueling fears of sectarian conflict in the world's top oil exporter. The news spooked both oil and equity markets.
"The Saudis had seemed to be walking the tightrope and avoiding problems, but the cleric story had people worried that it signaled problems there," said Robert Yawger, senior vice president, energy futures at MF Global in New York.
Traders were also unsettled by a report in an Egyptian newspaper -- quickly denied -- that Saudi Arabia had sent tanks to Bahrain to try to quell protests.
In Iran, pro-reform websites reported clashes between anti-government protesters and security forces in Tehran. This fed fears that another top oil supplier could be affected by the spread of turmoil that toppled leaders in Egypt and Tunisia, and spread to Oman and Bahrain.
"We're now at the point where a $1-$2 move is just a normal fluctuation," said Peter Beutel, president at Cameron Hanover in New Canaan, Connecticut. "At this point, we're rife with rumors and when any emerge from the 'Petroleum Gulf' we're going to see a jump. If there's some truth in it, the move will be $5-$6 rather than $1-$2."
The cascading unrest has driven prices up nearly 14 per cent in seven days, the biggest such rise since October 2009. Trading activity was subdued for a second day, suggesting some of the panicked, volatile trade of last week had given way to a more measured reaction in an uncertain market grappling with the most serious geopolitical risks since the U.S.-led invasion of Iraq.
"The low volume indicates sellers have backed away from these markets because no one can assert when or how this (turmoil) will end," said Tim Evans, energy analyst for CitiFutures Perspective in New York.