Brent crude prices rose above $118 a barrel and U.S. prices pushed to their highest level since September 2008 on Monday, before paring gains in volatile trading, lifted by Libya's conflict and the threat of wider supply disruptions in the Middle East.

In addition to supply shut in by the Libyan fighting, estimated to be about 1 million barrels per day, the prospect of unrest spreading to larger producers, such as Saudi Arabia, has kept investors concerned about the potential for more disruptions.

Oil traders in New York and London said prices fell back from the early peaks as some participants decided to lock in profits and on talk that Libyan leader Muammar Gaddafi was trying to negotiate an exit from Libya.

Brokers also noted increasing pressure on the U.S. government to tap strategic oil reserves as gasoline prices push higher as crude prices jump.

Brent crude futures for April delivery were up 62 cents at $116.59 a barrel at 12:01 p.m. EST (1701 GMT), pulling back from their earlier $118.50 peak.

U.S. crude futures for April delivery were 85 cents higher at $105.27 a barrel, off an intraday high of $106.95.

That intraday peak was U.S. crude's highest price since September 26, 2008, when front-month crude reached $108.11.

Brent's premium to its U.S. counterpart fell 12 cents to $11.20, having narrowed from the March 1 record above $17.

LIBYAN FIGHTING

Government forces seeking to dislodge rebels from Libya's strategically important coast struck at the Ras Lanuf oil town amid quickening efforts to prevent more humanitarian suffering and a mass refugee exodus.

A leading member of Libya's ruling establishment appealed to rebel leaders for dialogue in the clearest sign yet Gaddafi may be ready to compromise with opponents challenging his rule.

The offer was dismissed by rebel leaders.

Saudi Arabia's security forces detained at least 22 minority Shi'ites who protested last week against discrimination, activists said on Sunday, as the kingdom tried to keep the wave of Arab unrest outside its borders.

The major risk remains the prospect of the political unrest spreading to the Gulf producing region, said Caroline Bain, an economist at the Economist Intelligence Unit. However, even if there is civil unrest in Saudi Arabia, it is not a given that oil production will be affected.

STRATEGIC PETROLEUM RESERVE OPTION

A coordinated release of strategic oil stocks was deemed not yet needed because the supply disruption caused by the uprising in Libya is not that big, the International Energy Agency said.

But the U.S. government has reiterated that it could tap its strategic oil reserves in order to safeguard economic growth.

Echoing comments made by a number of Obama administration officials over the past week, White House Chief of Staff William Daley told NBC television on Sunday that the issue of the reserves is one we are considering.

(Additional reporting by Alex Lawler and Karolin Schaps in London and Alejandro Barbajosa in Singapore; Editing by Walter Bagley)

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