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Oil drops below $109 on Cyprus worries

* Stock markets, commodities tumble on Cyprus bailout deal

* Dollar, gold rally on worries over potential bank runs

* Investors eye Cyprus parliament vote over deposit tax

* Coming Up: U.S. NAHB Housing Market Index at 1400 GMT (Updates throughout, changes dateline, previous TOKYO)

By Christopher Johnson

LONDON, March 18 (Reuters) – Crude oil dropped more than $1 to below $109 a barrel on Monday as stock markets tumbled and the dollar strengthened after an unusual bank bailout proposal for Cyprus threatened to trigger fresh turmoil in the euro zone.

News that Cyprus would have to tax depositors as part of the bailout plan sparked fears of a run on some banks in the region, driving down the euro and other riskier assets such as Asian shares and base metals.

However, a series of recent positive numbers from the world’s top oil consumer the United States and worries over supply disruption helped stem further losses in oil.

Brent futures fell $1.52 a barrel to a low of $108.30 a barrel before recovering to trade around $108.60 by 0830 GMT. U.S. oil declined $1.10 t0 $92.35.

“Investors are worried that the Cyprus tax plan will set precedence for other EU nations that require bailout,” said Victor Shum, senior partner at IHS Purvin & Gertz.

Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt, agreed, saying the revival of worries over the health of the euro zone could force oil prices down further.

“Oil prices are still vulnerable,” Fritsch said. “Commodities are under pressure despite the fact that many of them did not benefit from the recent rally in stock markets.”

Oil markets will remain volatile for the next few days as investors watch for any spillover of the developments in Cyprus to other EU nations, analysts said.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of their deposits in return for a 10 billion euro ($13 billion) bailout for the island, which has been financially crippled by its exposure to neighbouring Greece.

EU BAILOUT

The parliament of Cyprus is to vote on Monday on whether depositors should forfeit part of their savings to fund a bailout, mainly needed to recapitalise banks.

The uncertainty surrounding the proposed bailout drove investors to the safety of gold, which rose above $1,600 an ounce for the first time in more than two weeks.

The dollar index rose 0.5 percent on Monday. A stronger dollar tends to weigh on dollar-denominated commodities such as oil.

“It’s a Cyprus shock. The euro fell, and crude followed that lower,” said Ken Hasegawa, a commodity sales manager at Newedge in Tokyo. “We don’t know what’s going to happen, and it’s becoming an uncertain factor.”

Technical signals are mixed for Brent as it is not clear that a rebound from the March 13 low has completed, Reuters technical analyst Wang Tao said. U.S. oil may drop to $91 as it failed to break resistance at $93.72 for the second time.

Further losses in oil were capped by expectations of a steady revival in demand growth from the United States.

U.S. manufacturing output bounced back in February in the latest signal of strength in an economy that is showing clear momentum. Factory production increased 0.8 percent last month after falling 0.3 percent in January, the Federal Reserve said. The gain was broad based and double what economists had expected.

Lingering worries of an escalation in a standoff between the West and Iran over Tehran’s disputed nuclear programme could also help ensure prices don’t fall much further. Concerns of supply disruption from the Middle East have kept Brent above $100 a barrel through most of 2012 and this year. (Additional reporting by Osamu Tsukimori in Tokyo; Editing by Anthony Barker)

Source: Reuters

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