* Libya unrest cuts oil output by as much as 1.2 mln bbls
* Saudi in talks with Europe's refiners to supply more
* Brent up more than $2 after whipsaw trading session on
Thursday
(Updates prices)
By Randy Fabi
SINGAPORE, Feb 25 (Reuters) - Oil rallied more than $1 a
barrel to top $112 on Friday as the revolt in Libya sparked
fears of supply shortages, despite assurances by top oil
exporter Saudi Arabia that it would step in to fill any
shortfall.
Unrest in Libya has shut in a large chunk of its 1.6 million
barrels per day oil output, prompting Saudi Arabia to launch
talks with European companies that buy most of Libya's oil
exports.
Brent crude for April delivery traded up $1.45 at
$112.81 a barrel by 0812 GMT. Prices briefly surged to a
2-1/2-year high of $119.79 on Thursday before settling at
$111.36.
U.S. crude traded $1.40 higher at $98.68, after
rising as high as $103.41 on Thursday, the highest since
September 2008.
"Now is not the time for producers to attempt verbal
finesse," analysts at Barclays Capital said in a research note.
"It is better to visibly supply more oil now, and then pull it
off the market swiftly if it later proves unnecessary."
Estimates varied on how much of Libya's production is down.
The International Energy Agency pegged the volume shut in at
500,000 to 750,000 bpd, while Italian oil company ENI
said as much as 1.2 million bpd may be down. Key Libyan oil
terminals are under rebel control.
SAUDI TALKS
Saudi Arabia was in talks with European companies affected
by the disruption in Libyan supply and was willing and able to
plug any gaps, senior Saudi sources said on Thursday.
Saudi Arabia has yet to make an official statement on the
talks, but sources said the country was able to pump more of the
kind of high-quality crude produced by Libya and it could be
shipped quickly to Europe with the help of a pipeline that
crosses the kingdom.
Oil markets fear the potential impact on the kingdom of a
wave of protests across the Middle East and North Africa that
has toppled long-time leaders of Tunisia and Egypt.
Saudi Arabia is the only oil producer with significant spare
capacity to meet global supply outages such as the reduction in
the flow from Libya.
"Anxiety and concerns about the people's revolt spreading to
other parts of the Middle East and North Africa continue to
support the markets," said Victor Shum, an analyst with energy
consultancy Purvin & Gertz.
Prices fluctuated more than $10 in whipsaw trading on
Thursday, the widest trading range since September 2008, as the
market reacted to rapidly unfolding events in Libya. Volatility
forced exchanges to hike trading margins sharply on Thursday,
including the first U.S. increase in over two years.
"When geopolitics in the Middle East are at play in the oil
markets, all conventional bets on the direction of oil prices
based on supply and demand fundamentals, or economic variables,
are off," analysts at BNP Paribas said in a research note.
The Libyan supply outage and concern that supply problems
may spread has driven up short-term prices for oil more than
those for later dates and led to the return of backwardation in
the Brent crude market.
The second-month Brent contract is at its highest
premium to the twelfth-month contract since April 2008.
RIDE IT OUT
With a spike in oil prices threatening the global economic
recovery, the IEA called on OPEC to draw an excess oil
production capacity if required to counter Libyan supply losses.
U.S. President Barack Obama and Treasury Secretary Timothy
Geithner sought on Thursday to quell fears that unrest in Libya
would put oil prices on a longer term upward trajectory.
"We actually think that we'll be able to ride out the Libya
situation and it will stabilise," Obama told a group of
corporate executives in reference to fuel prices.
The spread between Brent and U.S. crude narrowed to $13.97 a
barrel from $14.50 on Thursday.
(Reporting by Randy Fabi; Editing by Simon Webb)
