Oil prices jumped to above $103 a barrel on Monday after Libyan leader Moammar Gadhafi vowed a "long war" amid a second night of allied military strikes on the OPEC nation.
A coalition of the U.S., France, U.K. and other nations bombed tanks and anti-aircraft sites Sunday and deterred Libyan fighter jets from flying. Gadhafi said he would not resign and pledged to continue to attack the eastern rebel stronghold of Benghazi.
Fierce fighting during the last month has already shut down most of Libya's 1.6 million barrels per day of crude output. Investors are now concerned international intervention could extend the conflict and keep Libya's oil production out of the market longer than perviously estimated.
"The regime in Tripoli shows no sign of giving up," Capital Economics said in a report. "The prolonged loss of Libyan oil could push prices all the way up to the highs above $140 seen in 2008."
Gadhafi also warned that Western powers would not get Libya's oil, suggesting his forces may sabotage crude installations. Some traders worry a cornered Gadhafi could lash out in a last stand that disrupts regional tanker shipments.
"A 'scorched earth' response from Gadhafi could cause disruptions to ships traveling the Mediterranean," energy consultant The Schork Report said.
By early afternoon in Europe, benchmark crude for April delivery was up $2.12 to $103.19 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 35 cents to settle at $101.07 per barrel on Friday.
In London, the May contract for Brent crude was up $2.14 at $116.07 a barrel on the ICE futures exchange.
While equity markets were boosted Monday by hopes that Japan was making progress in bringing under control radiation leaks at its Fukushima nuclear power plant, analysts said concerns about lower energy demand from the world's third-largest economy would keep a ceiling over oil prices.
"The Japanese nuclear disaster seems to be coming to a close at an excruciatingly slow pace, meaning that the Japanese economic recovery will likely be slow and torturous," said Edward Meir at MF Global in New York, adding that the situation "will continue to exert a drag on energy prices."
In other Nymex trading for April contracts, heating oil was up 4.45 cents at $3.0688 a gallon and gasoline added 5.41 cents to $3.0035 a gallon. Natural gas gained 4.1 cents at $4.209 per 1,000 cubic feet.
Alex Kennedy in Singapore contributed to this report.
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