NEW YORK Brent crude oil surged as much as $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 August 27, 2008. U.S. crude rose $2.66 to settle at $99.63 a barrel, its highest settlement since September 30, 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 before production is restored, oil traders were beginning to shift their focus to even larger risks in the Gulf.
SAUDI, IRAN RUMBLINGS
Human rights activists told Reuters Saudi authorities had detained a Shi'ite cleric, fuelling 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 signalled 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 of 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 rumours 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."
In Oman the army wounded at least one person as it moved to disperse protesters near the northern port of Sohar.
The cascading unrest has driven prices up nearly 14 percent 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 Citi Futures Perspective in New York.
U.S. NYMEX crude trading volume was about 25 percent below the 30-day average at around 670,000 lots.
Brent's premium to its U.S. counterpart rose to $15.82 a barrel, up from Monday but off last week's record $16.91. Brent's price rise has been stronger because Europe is more vulnerable to supply disruptions from Libya and the region.
FUNDAMENTALS SET ASIDE
Prices also got a boost after the settlement from American Petroleum Institute (API) data that showed total U.S. crude inventories fell by 1.1 million barrels and gasoline stocks dropped by 4.7 million barrels.
The draw in crude stocks, which countered analyst forecasts for a 700,000 barrel build, came as U.S. crude imports fell by 589,000 bpd. Fog had delayed some tankers entering the Houston shipping channel last week. U.S. Gulf Coast stocks fell by 4.7 million barrels.
U.S. equity markets dropped on fears the jump in oil prices could choke off economic recovery, offsetting a positive reading on manufacturing.
The dollar recovered from a 3-1/2-month low against a currency basket hit ahead of Federal Reserve Chairman Ben Bernanke's appearance before Congress as the euro again failed to breach resistance at its 2011 high.
Bernanke said the recent surge in oil prices was unlikely to have a big impact on the U.S. economy, but could lead to weaker growth and higher inflation if sustained.
(Additional reporting by Gene Ramos and David Sheppard in New York, Zaida Espana in London and Florence Tan in Singapore; Editing by Dale Hudson and David Gregorio)