Oil falls on Japan worry, pares loss on Mideast

Oil prices fell on Tuesday as Japan's nuclear crisis following last week's earthquake sparked risk aversion, while unrest in Bahrain and Libya helped pull prices off lows.

Japan faced a potential catastrophe after a nuclear power plant exploded and sent low levels of radiation floating towards Tokyo.

The deep losses posted early were pared on reports of violent clashes in Bahrain, where Saudi Arabia sent troops on Monday, and fighting in Libya that saw further gains by forces loyal to Muammar Gaddafi's government against rebels.

Brent crude futures for April delivery fell USD 2.96 to USD 110.71 a barrel at 12:33 pm EDT (1633 GMT), having dropped as low as USD 107.88, its lowest since February 23.

U.S. crude futures for April delivery fell USD 2.17 to USD 99.02 a barrel, bouncing off a USD 96.71, the lowest price since USD 96.31 was hit on March 1.

"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 US crude as of last Tuesday reported by the US Commodities Futures Trading Commission on Friday.

Japan's nuclear crisis

An explosion on Monday at the Fukushima Daiichi unit 2 in Japan "may have affected the integrity of its primary containment vessel," the UN's International Atomic Energy Agency said.

Officials in Tokyo said radiation in the capital was 10 times normal by evening but posed no threat to human health.

Japanese stocks plunged 10.6%, posting the worst two-day rout since 1987, as concerns grew over the economic impact of the unfolding disaster.

Oil demand from Japan, the world's third-largest user, is likely to decline in the short term as manufacturing and transport stall but could then rise as the country seeks to replace nuclear with oil-fired power generation during reconstruction.

The International Energy Agency (IEA) said global oil demand was likely to be lower than previously forecast in 2011 as a result of a price shock and trimmed its forecast by 10,000 barrels to 1.44 million barrels per day.

Bahrain clashes reported

Oil markets kept a close eye on developments in the Middle East where Bahrain declared martial law on Tuesday, a day after Saudi forces arrived in the Sunni-ruled kingdom following weeks of protests by the island's Shi'ite Muslim majority.

Two men were killed and more than 200 people wounded in clashes on Tuesday, a hospital source said.

Opponents of Bahrain's Sunni ruling family called the move by Saudi Arabia a declaration of war, while Iran denounced it as unacceptable and the United States urged its nationals to leave the island, which is home to the US Navy's Fifth Fleet.

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.

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.