Oil drops 4.5 percent on Japan, Mideast clashes eyed

A driver pumps petrol into his car at a petrol station in Brussels March 8, 2011.

NEW YORK (Reuters) - Brent crude prices tumbled 4.5 percent on Tuesday, the biggest drop in 13 months, as Japan's escalating nuclear crisis sparked risk aversion across markets, outweighing concerns about turmoil in Bahrain and Libya.

U.S. crude prices fell nearly 4 percent as oil traders braced for an extended period of weak demand from the world's No. 3 consumer after an explosion at a quake-crippled nuclear power plant sent radiation wafting into Tokyo.

Oil markets, which shot to near $120 a barrel in February on protests in North Africa and the Middle East, also kept a close eye on violent clashes in Bahrain and fighting in Libya that saw further gains against rebels by forces loyal to Muammar Gaddafi's government.

Brent crude futures for April delivery settled at $108.52 a barrel, dropping $5.15 or 4.5 percent, its biggest percentage drop since February 4, 2010. During the session, it fell as low as $107.88, its lowest since February 23.

U.S. crude futures for April delivery fell $4.01 to settle at $97.18 a barrel. The intraday low of $96.71 was the lowest price since March 1, when prices fell to $96.31.

"It looks like the Japanese economy may be affected for a longer period than was thought last week," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

Total U.S. crude trading volume rebounded to 803,435 lots, up from about 566,000 on Monday, but still 10 percent below the 30-day average, according to Reuters data.

Risk aversion also hit commodities and stock markets, though U.S. equities recovered a bit after a U.S. Federal Reserve statement said the U.S. recovery was gaining traction and rising inflation pressures should prove transitory.

MARKETS BUFFETED BY JAPAN'S WOES

The market stayed focused on Japan, where two more blasts at the Daiichi plant in Fukushima facility blew a hole in a building housing a reactor and cooling pool for spent fuel rods. The unfolding crisis spooked investors, who fled riskier assets and parked money in government debt.

Analysts expect Japan's crude oil demand to decline in the short term due to shut refineries and stalled economic activity. An early view that distillate imports would spike to substitute nuclear plant generation with oil-fired power seemed to lose influence in the markets on Tuesday.

U.S. benchmark heating oil futures slumped more than 3.5 percent and the crack spread, or profit margin for refiners, fell $1.29 to $26.20 a barrel in post-settlement trading. Both posted gains on Monday.

Ahead of a seasonal specification shift from winter grade fuel, U.S. gasoline futures tumbled 5.3 percent, with the crack spread sliding $2.83 to $20.31 a barrel.

High retail pump prices kept U.S. gasoline demand lower last week versus the year-ago period, though pleasant weather pushed demand up versus the previous week, according to a MasterCard report.

BAHRAIN CLASHES, LIBYAN BATTLES

Oil investors watched developments in Bahrain where martial law was declared a day after Saudi forces arrived in the Sunni-ruled kingdom following weeks of protests by the island's Shi'ite Muslim majority.

Muammar Gaddafi's forces continued to make advances against rebels in Libya while world powers failed to agree to push for a no-fly zone.

With the focus firmly on Japan, oil reacted little to weekly inventory data from the American Petroleum Institute showing a slight build in U.S. crude stocks and an unexpected build in distillates, with traders awaiting further direction from U.S. Energy Information Administration data on Wednesday.

(Additional reporting by Nia Williams and Ikuko Kurahone in London and Alejandro Barbajosa in Singapore; Editing by David Gregorio)