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updated: 3/18/2013 7:45 AM

WTI drops from three-week high on Cyprus; Libyan pipeline shuts

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West Texas Intermediate crude fell from the highest price in three weeks as an unprecedented levy on bank savings in Cyprus threatened to worsen Europe's debt crisis. Libya shut an oil pipeline after protests.

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Futures slipped as much as 1.4 percent in New York, dropping for the first time in three days. Cyprus bowed to demands by euro-area finance ministers to raise 5.8 billion euros ($7.6 billion) by taking a piece of every bank account, sending the euro tumbling and sparking public outrage. The closing of the Waha Oil Co. pipe after a strike by truck drivers cut Libyan crude output by 120,000 barrels a day, according to Oil Minister Abdulbari al-Arusi.

"Confidence is rattled," Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen said by phone. "We have to figure out where this Cyprus debacle leaves us. Until we know for sure what's happening, it'll probably keep the market on the defensive for a few days."

WTI for April delivery declined as much as $1.31 to $92.14 a barrel in electronic trading on the New York Mercantile Exchange and was at $92.25 at 10:40 a.m. London time. The contract climbed 42 cents to $93.45 on March 15, the highest settlement since Feb. 20. The volume of all futures traded was 75 percent more than the 100-day average.

Euro Weakness

Brent for May settlement dropped $1.76 to $108.06 a barrel on the London-based ICE Futures Europe exchange. The number of futures traded was 5 percent below the 100-day average. The European benchmark grade was at a premium of $15.43 to WTI for the same month. That's down from $16 on March 15 and is the lowest since Jan. 17.

The euro fell as low as $1.2882, the weakest since December. A declining euro and stronger dollar typically decrease the appeal of investing in dollar-priced commodities such as oil.

"If we do see more robust economic growth in 2013, as indicated by a stronger U.S. dollar, oil demand will likely grow as well, putting pressure on an already tight global oil balance," analysts at at Morgan Stanley said in a note today. "Demand growth may even break out of the tepid range the oil markets have seen since 2008."

Bank Run

While Cyprus accounts for less than half a percent of the 17-nation euro economy, the levy on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece, extending the region's recession and curbing fuel demand. In a bid to ease a run on banks, depositors who keep their account for two years will receive securities linked to future revenue from the country's natural gas reserves, President Nicos Anastasiades said.

Cyprus may have as much as 60 trillion cubic feet of gas in its territorial waters, Charalambos Ellinas, the chairman of Kretyk, as the nation's state-owned hydrocarbons company is known, said in Nicosia March 15. That's similar to Kuwait's proved reserves of 63 trillion cubic feet at the end of 2011, according to BP Plc's Statistical Review of World Energy. Russia had the world's biggest reserves at 1,575 trillion cubic feet, the BP data shows.

"A sell-off is occurring and that's following a general reaction from risk markets in Asia from news about Cyprus," said Ric Spooner, a chief market analyst at CMC Markets in Sydney. "Further weakness from here would be potentially bearish in the sense that it indicates the end of a minor upward correction against a longer-term downtrend in oil."

Downward Pressures

Fereidun Fesharaki, the chairman of FGE, an energy consultant, forecast in a Bloomberg television interview today that Brent will fall to about $88 a barrel in two years as oil output in the U.S. increases and demand there slows.

"The price of oil is too high," said Fesharaki. "You hear the news about Cyprus, which is maybe a one-day story, but it does add to the pressures downwards. Fundamentally, prices are higher than they should be."

Saudi Arabia and Iraq raised crude exports in January for the first time in three months as demand from Asian countries climbed, according to data on the website of the Joint Organisations Data Initiative yesterday.

Oil-price fluctuations aren't good for the global economy in the long term, Saudi Arabia's Oil Minister Ali Al-Naimi said in Hong Kong today. The country plans to drill about seven test wells for shale gas this year, he said.

Net-long positions in WTI held by money managers, including hedge funds, commodity pools and commodity-trading advisers, slipped by 554 futures and options combined, or 0.3 percent, to 166,944 in the week ended March 12, according to the Commodity Futures Trading Commission's March 15 Commitments of Traders report. Bullish bets were at the lowest level since Jan. 1.

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