Oil falls as Libya calls truce, but fears remain

Reuters, Saturday 19 Mar 2011

Oil prices slipped on Friday after two days of gains, as Libya declared a ceasefire

Oil prices slipped on Friday after two days of gains, as Libya declared a ceasefire, easing for the moment the threat of a Western air attack that could escalate the conflict and further damage oil facilities.

Oil closed out a volatile week with yet another day of below-average trading activity, as dealers remained reluctant to place big bets in the face of Japan's ongoing nuclear crisis and doubts that Muammar Gaddafi's truce would bring any swift resolution to the month-long rebellion.

Another increase in China's rate reserve requirements and continued unrest in countries bordering top oil exporter Saudi Arabia further clouded the picture, keeping implied volatility levels near their highest since June.

Brent crude futures for May delivery fell 97 cents to settle at $113.93 a barrel, falling sharply from an earlier $117.29 peak after Libya's foreign minister declared "an immediate stop to all military operations."

Despite Friday's price drop, Brent crude ended the week up nearly 1 percent, after Japan's earthquake a week ago pressured prices.

U.S. crude futures for April delivery fell 35 cents to settle at $101.07 a barrel, off their high of $103.66, but finding support just above the $100-a-barrel level. U.S crude dipped only 9 cents from the prior week.

U.S. trading volume just above 600,000 lots, near or below that level for the third time this week, underscored the deep uncertainty facing the market. Traders have liquidated around 5 percent of their positions since last Friday, when open interest in U.S. crude reached a record 1.6 million lots.

Speculators cut their net-long positions in U.S. crude futures in the week to March 15, easing from a record high the previous Tuesday, the U.S. Commodities Futures Trading Commission said.

Prices partly pared losses after President Barack Obama warned Gaddafi to comply with U.N. demands for a no-fly zone or else face consequences that include military action, echoing comments from France and Britain that came amid reports of continued attacks on rebel-held towns..

"This does not mean we are near a resolution of the situation in Libya. We may be facing the possibility of an entrenched status quo between pro- and anti-Gaddafi groups," said Harry Tchilinguirian, an analyst at BNP Paribas.

"This only maintains the uncertainty in terms of when we will eventually have a full resumption of production in Libya."

VOLATILE MIDDLE EAST

While Libya's conflict pushed markets around, unrest in the Middle East also provided uncertainty.

Yemen's president declared a state of emergency after at least 25 protesters were killed at an anti-government rally.

In Syria, a violent crackdown killed at least three demonstrators on Friday.

A crackdown by authorities in Bahrain against Shi'ite protesters demanding reform from the Sunni monarchy drew criticism from the United States and Iran.

Sunni-ruled Saudi Arabia, OPEC's top oil exporter, sent troops into Bahrain this week along with other forces from the Gulf Cooperation Council.

Eyeing the region's growing unrest, Saudi Arabia's King Abdullah announced on Friday $93 billion in handouts and boosted its security apparatus, but he made no mention of a long-awaited cabinet reshuffle.

Implied volatility, a gauge of how much prices are likely to fluctuate based on options trading, spiked as the Libyan conflict erupted a month ago, and has remained elevated since then. At-the-money volatility stood at just above 40 percent on Thursday, just off a peak 42.7 a week ago.

JAPAN'S NUCLEAR CRISIS

Oil prices came under pressure earlier in he day after China's central bank said it would raise lenders' required reserves, another move to rein in inflation that could dampen oil demand.

Japan's earthquake and tsunami a week ago, and the resulting nuclear reactor crisis, caused oil prices to ease some, after unrest in the Middle East and North Africa drove oil prices to a 2-1/2-year highs, with Brent nearing $120 last month.

Risk-averse sentiment increased as Japan struggled to prevent catastrophic radiation releases from its quake-damaged nuclear reactors, even as oil investors tried to assess the short- and long-term impact the disasters will have on oil demand and economic activity.

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