Libya is the world's 10th largest oil exporter and also supplies 12 per cent of Italy's gas needs. "The whole industry will probably shut within days," said an oil trading strategist with a major European oil company which operates oilfields in Libya.
Brent crude oil futures for April delivery rose $1.11 to $106.89 a barrel on the ICE Futures Europe exchange in London, after hitting a two-and-a-half year high of $109 on Monday. In New York, the US benchmark price rose 66 cents to $96.08 a barrel.
Hundreds of demonstrators have been killed by security forces and large swathes of the country are already in control of local communities, human rights groups and protesters say.
Robert Baer, a columnist with Time magazine, cited a source close to Muammar Qaddafi as saying that the leader had ordered oil pipelines to be blown up.
Mr Qaddafi's son earlier predicted a bloody civil war and accused protesters of planning to burn Libya's oilfields.
Several senior Libyan officials have defected, including many managers of the oil industry, diplomats and soldiers.
Foreign energy companies in Libya including ENI, Repsol and Wintershall have all stopped output and the gas pipeline to Europe closed on Tuesday, company officials said.
Libyan banks have stopped financing exports, refineries have cut operations and some export terminals are closed, oil traders said.
Other Opec nations including Saudi Arabi and UAE have offered to increase oil exports to compensate for any disruption, but ministers meeting in Riyadh on Tuesday said there was no need for extra oil yet. "There is no shortage of supply," said Ali al Naimi, Saudi Arabia's Minister for Petroleum.
Opec has about 5 to 6 million barrels of daily oil capacity available to cover any disruption, and stands ready to use it at short notice, he added. For the latest updates PRESS CTR + D or visit Stock Market news Today
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