U.S. oil prices shot to $100 a barrel on Wednesday as Libyan fighting spread and oil companies further cut crude production, raising fears of a prolonged disruption to supplies.
Oil prices later pulled back to settle at $98.10 a barrel on the New York Mercantile Exchange, up $2.68, or 2.8%. The gain follows an 8.5% rise Tuesday.
It was the first time since October 2008 that U.S. prices touched $100. European crude, which has been above $100 a barrel since early February, on Wednesday settled at $111.25 a barrel, up $5.47, or 5.2%.
The spike continued to dim the outlook for the stock market, as share prices fell around the world. The Dow Jones Industrial Average dropped 107.01 points, a 0.9% decline, to 12105.78, that capped the index's worst two days since August.
After a year of relative calm in the oil markets—prices ranged mostly between $70 and $85—producers, traders and consumers scrambled to assess the impact of the unfolding Middle East turmoil. Reports on the effects on Libyan production have been conflicting, and analysts have differed on how much impact it would have on world supplies.
Until this week, the unrest hadn't roiled a major oil-producing nation, limiting the reaction. Now, market participants are keeping one eye on Libya and another on Algeria, another major exporter that some analysts say could also descend into turmoil. "It is increasingly looking as if this is the real deal in terms of a supply shock," wrote analysts at JBC Energy in Vienna.
Total SA, the French oil company, said Wednesday it had started shutting down Libyan production, following other large firms. OMV AG of Austria also said it was suspending its operations in Libya, which accounts for 10% of its global output, sending its shares tumbling 5%. As much as a third of Libya's daily output is now cut off, according to estimates.
European countries such as Spain, France and Italy that are heavily reliant on Libyan crude may face logistical problems in the short term.
Other members of the Organization of Petroleum Exporting Countries have promised to help replace whatever is lost. But Libya's crude is of particularly high quality. Most of the marginal crude available from Saudi Arabia and the United Arab Emirates has higher sulfur content, making it harder to refine into gasoline. Also, oil from the Persian Gulf takes much longer to reach Europe than oil from Libya.
Some worry that if Saudi Arabia and others are forced to replace Libyan production, the world will have less of a buffer to handle any further supply shocks, potentially sending oil prices even higher.
Analysts began weighing predictions of vastly higher oil prices. Crude could hit $150 a barrel if production is cut off from Libya and another big oil producer, said Michael Wittner, head of commodities research in the Americas at Société Générale. If the second country were Algeria, an even bigger exporter, prices could peak above $220 a barrel, said analysts at Nomura.
"It feels like 2011, which started off as an oil story surrounded by economic growth, is now becoming a story surrounded by concerns about supply disruptions," said Ruchir Kadakia, director of global oil fundamentals at IHS Cambridge Energy Research Associates.
That threat has injected new volatility into a market that had been becalmed for more than a year, raising new risks for producers, consumers and the economy as a whole. The CBOE Oil Volatility Index, a measure of price swings, has risen 34% over the past two sessions.
Many oil buyers are increasing their hedging now that volatility is back. "We are seeing more hedging activities not just from energy producers but also the general manufacturing industry," said Fred Demler, head of global commodities at brokerage MF Global.
Still, many traders seem to be betting that the current problems won't deteriorate into a lasting supply crisis—they point to the abundant strategic reserves held by Western countries, which could be released under the aegis of the International Energy Agency.
While U.S. oil prices are spiking on contracts for near-term delivery, prices for oil in 2013 have dropped 0.6% on average in the past two days, suggesting buyers aren't concerned about future supplies.
"So far, what the markets are telling us is that risk is present, but [a significant supply disruption is] not the most likely outcome," said Colin Fenton, global head of commodities research at J.P. Morgan Chase.
In the stock markets, shares piled on a second day of steep losses as the concerns over rising oil prices and disappointing sales at technology heavyweight Hewlett-Packard sent investors scrambling for safety.
H-P's drop of $4.64, or 9.6%, to $43.59, accounted for the bulk of the declines in the blue-chip Dow. The Standard & Poor's 500-stock index fell 8.04 points, or 0.6%, to 1307.40, while the tech-heavy Nasdaq Composite fell 33.43 points, or 1.2%, to 2722.99.
Lowe's fell 26 cents, or 1%, to 25.73 after the home-improvement retailer said fourth-quarter profit rose 39% but offered a lackluster profit forecast, citing market uncertainty. Lowe's also disappointed with same-store sales growth of 1.1%, lower than expectations and far behind that of rival Home Depot, which saw growth of 3.9%. Home Depot fell 79 cents, or 2.1%, to 37.30.
Among clothing retailers, Chico's FAS surged 1.09, or 9%, to 13.15 after the women's fashion retailer reported better-than-expected sales and painted a rosy revenue outlook, driven by more than 100 store openings. TJX fell 91 cents, or 1.8%, to 48.81 after the parent of T.J. Maxx and Marshalls said its fourth-quarter profit fell 15%. But Saks dropped 31 cents, or 2.6%, to 11.86 after beating earnings expectations and reporting an 8.4% increase in same-store sales.
Kellogg gained 27 cents, or 0.5%, to 53.46 after slightly raising its long-term sales-growth forecast to between 3% and 4%. The cereal and snack maker was plagued by supply-chain woes in recent years.
Private-equity firm KKR climbed 19 cents, or 1.2%, to 16.37 after reporting fourth-quarter profit of $180.6 million, beating analysts' estimates, as the value of its investments rose.
Toll Brothers added 44 cents, or 2.1%, to 21.20 after the luxury home builder reported a surprise return to profitability, aided by a home-price increase and a low cancellation rate.
Netflix slid 10.40, or 4.7%, to 211.20, bringing its weekly losses to 10%. The declines came after news that Amazon.com is launching a rival streaming-video offering. Amazon.com fell 3.74, or 2.1%, to 176.68.
Garmin reversed early losses to add 22 cents, or 0.7%, to 32.36 after the maker of global-positioning-systems devices reported a 52% slide in fourth-quarter profit, missing analysts' expectations.
In deal news, Enterprise Products Partners said it has offered to acquire Duncan Energy Partners. Duncan surged 7.84, or 24%, to 40.40, while Enterprise Products fell 73 cents, or 1.7%, to 42.97.
The day's sole data point showed existing-home sales unexpectedly rose in January, though the housing market continues to be plagued by falling prices. Demand for used homes increased by 2.7% to a seasonally adjusted annual rate of 5.36 million in January, the National Association of Realtors said. Analysts had expected a decline of 0.8%.
Gold finished 0.9% higher at $1,413.40 an ounce. The euro climbed to $1.3747, from $1.3654. The yield on the 10-year Treasury note rose to 3.487%.
Write to Jonathan Cheng at jonathan.cheng@wsj.com
