Brent crude prices on Tuesday tumbled 4.5 per cent, its biggest drop in over 13 months, as Japan's escalating nuclear reactor crisis sparked risk aversion even as clashes in Bahrain and Libya briefly pulled prices off lows.
U.S. crude prices fell nearly 4 per cent as oil demand in Japan looked to be curbed for a more prolonged period as the country faced a potential catastrophe after a nuclear power plant exploded and released low levels of radiation.
Violent clashes in Bahrain and fighting in Libya that saw further gains by forces loyal to Muamhar Gaddafi's government against rebels caused a brief bounce well above lows.
Brent crude futures for April delivery settled at $108.52 a barrel, dropping $5.15 or 4.5 per cent, its biggest percentage drop since Feb. 4, 2010. During the session, it fell as low as $107.88, its lowest since Feb. 23.
U.S. crude futures for April delivery fell $4.01 to settle at $97.02 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.
"And there was record length and that made the market even more vulnerable to the downside."
McGillian was referring to the record net-long positions in U.S. crude as of last Tuesday reported by the U.S. Commodities Futures Trading Commission on Friday.
Total U.S. crude trading volume at nearly 772,000 lots was 15 per cent below the 30-day average.
Oil prices held losses after the U.S. Federal Reserve released a statement saying the U.S. recovery was gaining traction and that rising inflation pressures will probably prove transitory.
Tuesday's oil price slide came ahead of weekly oil inventory reports, with analysts surveyed by Reuters expecting that U.S. crude stocks rose last week.
MARKETS BUFFETED BY JAPAN'S WOES
Commodities and equities prices fell after an explosion on Monday at the Fukushima Daiichi unit 2 in Japan, a blast that the U.N.'s International Atomic Energy Agency said "may have affected the integrity of its primary containment vessel."
Japan's crude oil demand, the world's No. 3 consumer, was expected to decline in the short term due to shut refineries and stalled economic activity.
But an early expectation that distillate imports would soon spike in order to substitute nuclear plant generation with oil-fired power seemed to fade some on Tuesday.
U.S. benchmark heating oil futures slumped more than 3.5 per cent and the crack spread, or profit margin for refiners, dipped 65 cents to $26.84 a barrel after both posted gains on Monday.
Ahead of a seasonal specification shift from winter grade fuel, U.S. gasoline futures tumbled 5.3 per cent, with the crack spread sliding $2.62 to $20.52 a barrel.
BAHRAIN CLASHES, LIBYAN BATTLES
Oil investors kept a close eye on 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.
Violence broke out and two men were killed and more than 200 people wounded in clashes, a hospital source said.
Gaddafi's forces continued to make advances against rebels in Libya while world powers failed to agree to push for a no-fly zone.
Libya's oil output will take some time to return to normal, the head of the Libya's National Oil Corporation said, because some installations were damaged in the fighting.