Libyan oil facilities could be attacked closing them for months, warns investment bank Merrill Lynch Saudi Arabia has sought to ease renewed pressure on the oil market on Monday.
Oil prices had risen 2% in early trading, due to the shutdown of Libyan production as well as fears that unrest might spread to Saudi Arabia itself.But prices fell back again after Saudi state oil company Aramco announced that all demands for extra oil had been met.
Sentiment was also boosted by news that the eastern Libyan port of Tobruk had reopened and a Chinese tanker was being loaded.
By 1230 GMT, Brent crude was slightly higher for the day at $112.75, while US light, sweet crude was largely unchanged at $98.25.
Brent had earlier reached $114.50 - still well below its Thursday peak of $119.80 - while US light, sweet crude hit $99.50.
Stock market fall Libyan oil output is down an estimated 75% due to the revolt, but the Saudis promised to meet the shortfall.
However, on Sunday, the Saudi stock market fell 5% after 119 academics, activists and businessmen wrote an open letter to the king demanding reform.
The Tadawul all-share index has fallen a cumulative 10% in the last two weeks to its lowest level in six months, prompting some Saudi investors to call on the government to intervene to steady the market, or even to close it. Last Updated at 28 Feb 2011, 15:15 GMT *Chart shows local time
The index had recovered early losses and remained largely unchanged for the day on Monday.
The news comes as the Egyptian stock exchange is set to reopen on Tuesday after a month-long closure due to the popular uprising there, although protesters continued to gather outside the stock exchange building intent on forcing another delay.'Spike and crash scenario' Libyan supply could be knocked out for months, according to a report by US investment bank Merrill Lynch.
The Wall Street firm said that as much as 1.2 million barrels-per-day of production may have been shut down already, and that production facilities in the west of the country were prone to attach by government or opposition forces, which would lead to a prolonged output loss.
There remained a substantial risk that oil prices could move sharply higher, undermining the global economic recovery, the research piece warned, and the market only had limited ability to withstand further unrest in the Middle East.
"The combination of a substantial run-up in demand coupled with a very severe supply shock makes a spike and crash scenario increasingly likely for global oil prices and the world economy," it said.
The investment bank said that a 10% rise in oil prices - if sustained - would lead to a 0.5% reduction in global oil demand.
Saudi 'day of rage' The letter to the Saudi king complained about the prevalence of corruption and nepotism and a widening gap between state and society.
Markets are beginning to fret that King Abdullah of Saudi Arabia may be the next to face protests Analysts fear the kingdom may face the same volatile generational schism that has affected Egypt and elsewhere.
Two-thirds of the Saudi population is aged under 30.
Youth unemployment is about three times the national average and there is an 18-year waiting list for government-provided housing.
The threat of protests has already wrung concessions from the 87-year-old King Abdullah, who only recently returned from three months of medical treatment in the US.
He has offered permanent work contracts to an estimated 50,000 state workers, and spent $36bn (£22.3bn; 26.1bn euros) of the country's $440bn in currency reserves on social initiatives, including a 15% pay rise for public sector employees.
Swing producer Saudi Arabia plays a critical role in global oil supplies.
The kingdom accounts for the bulk of Opec's additional 4.7 million barrels-per-day available, compared with Libya's exports estimated at 1.5 million.
Meanwhile violence flared on Sunday for the first time in non-Opec Oman - which produces about 865,000 barrels-per-day - as police cracked down on pro-democracy demonstrations there.
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