Oil has surged to the highest level since September 2008 as Middle East turmoil threatened to spread from Libya and steep price rises show no sign of easing.

Motorists in New Zealand were hit with a 5c a litre rise in petrol and diesel prices this week, freight surcharges have jumped while the effect of the falling Kiwi dollar, weakened following the Christchurch earthquake, means prices are set to spike even further.

The Kiwi dollar plunged nearly US1c yesterday afternoon in reaction to comments by Prime Minister John Key on the outlook for interest rates.

"The market has priced in a cut from the Reserve Bank," Key said in reference to the March 10 official cash rate announcement.

"That would probably be my expectation, that the Reserve Bank would cut."

Oil has hit US$100 a barrel and a New Zealand oil company chief said there were similar factors now to those which pushed oil to US$147 a barrel in mid-2008.

Greenstone Energy chief executive Mike Bennetts said Libyan light sweet crude - whose supplies had been choked off - was different to that produced by Saudi Arabia.

"They're producing the less preferred type. Prices suddenly spike on what appears to be a modest supply disruption," Bennetts said.

"My view is there is significant upward price pressure on crude oil and you put that alongside sentiment around a weakening Kiwi dollar and a Christchurch earthquake and difficult economy we've got a difficult period ahead for the short term."

Greenstone, which owns Shell stations throughout New Zealand, had held prices in Christchurch but had limited capacity to do so.

"We recognise as a New Zealand-owned company that we are able to manage some of the volatility that takes place. But our ability to do that for an extended period of time is quite limited."

Asian markets fell sharply yesterday as traders dumped shares following steep drops on Wall St amid soaring oil prices could paralyse the global economic recovery.

Crude prices jumped 2.7 per cent yesterday as Libyan rebels braced for renewed clashes with forces loyal to leader Muammar Gaddafi.

"All over the region, things are keeping the market very nervous," said Phil Flynn, vice-president of research at PFGBest in Chicago. "Right now in this Middle East situation there's no real end in sight."

Oil for April delivery rose US$2.66 to US$99.63 a barrel on the New York Mercantile Exchange, the highest settlement since September 2008.

Prices jumped 5.2 per cent in February and have risen 27 per cent in the past year. In New York yesterday oil touched $100.68 a barrel at one point.

Fighting in Libya caused its output to drop last month to the lowest level since January 2003, according to oil companies, producers and analysts.

Political turmoil has spread to Saudi Arabia's neighbours, with protests erupting in Oman and Bahrain. Websites have called for a nationwide Saudi "Day of Rage" on March 11 and 20 by a group that wants the immediate release of a dissident Shia cleric.

The kingdom's sharemarket slumped 6.8 per cent to 5538.72.

The measure has lost 20 per cent since reaching its 2010 high, the common definition of a bear market.

"With the potential for negative developments in so many countries, we're starting to see the risk premium return for crude," said Matt Smith, a commodities analyst for Summit Energy in Louisville, Kentucky.

Iran's Foreign Ministry said issues relating to its opposition are "internal affairs" without commenting on allegations by dissidents that authorities had detained the main opposition leaders Mehdi Karrubi and Mir-Hossein Mousavi.

Saudi Arabia pumped 8.43 million barrels a day of oil in February, the most since 2008 and Iran produced 3.71 million, according to estimates compiled by Bloomberg.

Crude also rose as manufacturing in the United States grew in February at the fastest rate since May 2004, a signal that demand may rebound in the world's largest oil-consuming country.

In London, Brent crude for April delivery was up US23c to US$115.65 a barrel on the ICE Futures exchange.