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A Saudi-owned crude oil tanker is shown. The oil powerhouse pledged to supply the world's oil needs in the wake of Libya's unfolding chaos Tuesday. (Knut Brandt/Reuters)

Oil prices soared to the highest level in more than two years as violence spiraled out of control in Libya and Moammar Gadhafi's grip weakened, threatening the country's sizable oil exports and raising concerns that violence would spread to other major oil producers in the Middle East.

Benchmark West Texas Intermediate jumped $6.73, nearly seven per cent, to $92 US per barrel on the last trading day for the March contract on the New York Mercantile Exchange. Most of the trading already has switched to the April contract, which climbed $5.90, or 5.9 per cent to $95.59 per barrel, the highest since Oct. 2, 2008.

'The worry is about what's next. What if protests persist in Iran and things get out of hand?'—Oil analyst Victor Shum

"An additional $10 on the price of oil is not insignificant, particularly for weaker economies in Europe facing a major fiscal squeeze," Capital Economics said in a report. "Given the pace at which events are unfolding, it would be daft to rule out a spike to $140 or beyond in the coming weeks, if the unrest disrupts output from the larger oil producers."

Spanish oil company Repsol-YPF said Tuesday it suspended production in Libya. Other oil companies, including Italy's Eni, Royal Dutch Shell PLC, U.K.-based BP and Germany's Wintershall, started pulling out employees. Meanwhile, key Libyan officials resigned and air force pilots defected amid a bloody crackdown on the protests. Canadian firms Suncor Energy Ltd. and SNC-Lavalin Group Inc. also reportedly began pulling their employees out of the country and curtailing operations on Monday.

Eager to soothe world markets, Saudi Arabia's oil minister says the oil powerhouse has ample spare capacity to offset any supply disruptions. Tuesday's comments by Ali Naimi came as Libya unrest sent oil markets surging for a second day.

Ratings downgrade

Libya saw its debt rating cut by Standard & Poor's on Tuesday, the second time in as many days that that's happened after Fitch did so on Monday. S&P slashed Libya's rating to BBB+ from A-, and warned that another downgrade is possible some time in the next three months.

Though Libya has no outstanding debt, its credit ratings are an indication of its standing in global financial markets at a time when the country had been trying to open up the economy to foreign investment.

The official Saudi Press Agency quoted Naimi as saying that Saudi's production capacity of 12.5 million barrels per day can help "compensate for any shortage in international supplies."

Libya is the world's 12th-largest producer of oil, supplying 1.53 million barrels per day. With 44 billion barrels of proven or probable reserves, it is Africa's largest oil power. The country earns more than $46 billion a year from oil, which makes up 95 per cent of Libyan exports.

Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, currently produces around eight million barrels per day.

"The worry is about what's next. What if protests persist in Iran and things get out of hand?" said Victor Shum, an energy analyst at Purvin and Gertz in Singapore.

Two Iranian naval vessels entered the Suez Canal on Tuesday en route to a training mission in Syria, officials said, the first time that Tehran has sent military ships through the strategic waterway since the 1979 Islamic Revolution.

With files from The Canadian Press and The Associated Press