| NEW YORK
NEW YORK Oil held near 2-1/2 year highs on Tuesday, with worries about turmoil in Libya that sent prices soaring the previous session eased by expectations that OPEC and the International Energy Agency could meet any shortfall in oil supplies.
At least three international oil companies have halted production in Libya, which pumps nearly 2 percent of world output. Some companies have been pulling employees and their families out of Africa's third-largest producer, though others say they are keeping oil flowing there.
Oil prices surged as much as 6 percent on Monday, taking Brent crude in London to almost $109 a barrel at one point for the first time since 2008. Prices remained strong on Tuesday, but closer to $106.
"We've lost 300,000 bpd of production (in Libya) already with the potential for further cuts to output and exports," said Andy Lebow, a trader at MF Global in New York.
"The major underlying fear in the market is that these protests spread in the region to even larger producers like Saudi Arabia. While that might not look likely right now, even a hint of real problems there could send prices vertical."
Brent crude for April delivery rose 4 cents to settle at $105.78 a barrel, the highest close since September 2008 but off earlier highs of $108.57. Brent hit a 2-1/2 year high of $108.70 a barrel on Monday.
U.S. crude for March delivery, which expired on Tuesday, rose to $93.57 a barrel, after touching $94.49, the highest since October 2008. It was up $7.37 a barrel from Friday; although the market traded on Monday, it did not print an official settlement price due to a holiday.
The more actively traded April contract gained $5.71 from Friday to trade at $95.42 a barrel.
In a defiant speech on Tuesday, Libyan leader Muammar Gaddafi refused to step aside and threatened tougher action against protests, as rebel troops said eastern regions, including major oilfields, had broken free from his rule.
Two more oil companies, Italy's ENI and Spain's Repsol, halted output, cutting some 13 percent of its 1.6 million barrels per day (bpd) of crude oil production. U.S. companies said their output was still flowing.
BRACED FOR VOLATILITY
Lebow said that traders were not buying oil at the same rate as Monday, but few wanted to go short with so much uncertainty in the Middle East.
Option investors bet on higher crude prices and more volatility, with the Crude Oil Volatility Index, known as the "Oil VIX," surging more than 22 percent.
But oil futures pared gains after reassurances on supply from Saudi Arabia, the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), and from an official from the International Energy Agency (IEA), who reiterated that the agency stood ready to address any real disruptions by tapping member stockpiles.
Saudi Arabian Oil Minister Ali al-Naimi, speaking on the sidelines of the International Energy Forum in Riyadh, said the group would meet any real supply shortages, though he stopped short of announcing more production immediately, saying prices were driven primarily by speculation and fear.
"What I would like you to convey to the market: right now there is absolutely no shortage of supply," Naimi told a news conference.
"I think this is a situation of fear, concern which will be very short term and will have no long range effect," adding he did not see prices spiking toward $150 a barrel as they did in 2008, before crashing as the economic crisis took hold.
Spare capacity in the first-half of 2008 was only around 2 million bpd, far lower than the estimated 5-6 million bpd now that could be called upon to meet any disruptions.
The IEA rarely opens the taps but members hold 1.6 billion barrels of emergency oil stocks. They were last tapped in 2005 after Hurricane Katrina crippled U.S. Gulf oil operations.
Wintershall, the oil and gas exploration arm of Germanchemicals company BASF, said Monday it was temporarily shutting down its 100,000 bpd production partnership with Libya's National Oil Corporation.
Oil product traders operating in the Mediterranean also said exports from Libya were severely disrupted on Tuesday, but some traders said cargoes were continuing to load.
(Reporting by David Sheppard, Matthew Robinson and Gene Ramos in New York; Claire Milhench in London and Francis Kan in Singapore; Editing by David Gregorio and Sofina Mirza-Reid)