3:34 AM
By Jeff Mason and Amena Bakr
WASHINGTON/RIYADH | Fri Feb 25, 2011 5:39am EST
WASHINGTON/RIYADH (Reuters) - The world can weather a spike in oil prices, U.S. President Barack Obama said, as Saudi Arabia offered some respite to fears over Middle East oil supplies by indicating it can cover export cuts resulting from Libya's civil war.
After a surge in Brent oil prices to 2- year highs near $120 a barrel, South Korea, the world's fifth-biggest crude importer, warned that its inflation situation was getting tougher.
Business executives fretted about rising prices and investment banks said oil was reaching an inflection point that could endanger the world's recovery from the global financial crisis.
"We actually think that we'll be able to ride out the Libya situation and it will stabilize," Obama, referring to fuel prices, told a group of corporate chief executives.
His Treasury Secretary said the world had plenty of oil reserves.
"We have substantial capacity across the major economies in the strategic reserves," Timothy Geithner said.
"Hopefully, by reminding people of that and calling attention to the fact that there's a fair amount of excess capacity in parts of OPEC ... hopefully that will make it less likely the market ... starts to build in higher prices over time."
The key risk for the world economy is a sustained rise in the price of oil. But after shooting up to close to $120 a barrel in intraday trade on Thursday, Brent crude futures ended the day at less than $112, showing just how fraught investors nerves are.
The sharp fall came after market rumors that Libyan leader Muammar Gaddafi had been shot dead and on news that top producer Saudi Arabia could cover any supply disruptions.
On Friday, Brent crude was trading around $112. U.S. crude futures eased to $97.60 from a Thursday high of $103.41.
In Libya, forces loyal to Gaddafi hit back in fierce gun battles with rebels holding towns near the capital but there were no signs they had broken the opposition momentum.
The Organization of the Petroleum Exporting Countries (OPEC) has an estimated 4-6 million barrels per day of spare crude production capacity, more than enough on paper to cover Libya's output of 1.6 million barrels a day.
But markets are worried that the unrest might spread to bigger producers in the region that would have a much bigger impact on the world economy.
After public uprisings have already toppled leaders in Egypt and Tunisia, governments in the region are taking notice.
Saudi Arabia this week unveiled a $37 billion package to try to insulate the kingdom from the wave of protests across the Arab world, while Algeria lifted a 19-year-old state of emergency as it tried to appease opposition groups.
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