Brent crude holds above $111/bbl

SINGAPORE – Brent reversed early losses to hold above $111 yesterday as tensions in the Middle East kept a floor under prices, while investors continued to weigh the impact on energy demand from a worsening nuclear crisis in quake-hit Japan.

Brent crude for May, the front-month contract after April expired on Wednesday, rose 70 cents to $111.30 a barrel at 0658 GMT (2:58 a.m. ET), after earlier falling as much as one percent to $109.45.

Prices have slid about four percent since Japan’s earthquake and tsunami six days ago, touching a three-week low of $107.35 on Wednesday. They reached a 2-1/2-year high last month as violence in Libya disrupted the country’s oil output.

Bahraini forces on Wednesday cleared a protest camp in Manama after Saudi Arabian troops entered the country earlier this week, when the island state’s monarchy called for help from Gulf Cooperation Council (GCC) allies.

“The government crackdown and the foreign troop deployment may make it more difficult for a compromise to be reached between the Sunni royal family and the mainly Shiite protestors,” said Barclays Capital analysts Helima L. Croft and Amrita Sen.

The violence has transformed a crisis between the island’s majority Shi’ites and minority Sunnis into a regional standoff between Sunni Gulf Arab states and non-Arab Shi’ite power Iran.

“Not only does the Saudi leadership fear growing Iranian influence in neighboring Bahrain, they are concerned that the protests will spill over to their own oil-rich eastern provinces where Shi’ites reside in large numbers,” said Croft and Sen.

Bahrain lies less than 100 kms from the hub of the Saudi oil industry at Dhahran, including the world’s largest oil fields, oil terminal and processing plant. Recent demonstrations by Saudi Shi’ites have also centered in the kingdom’s east.

“Anything that causes unrest in Saudi Arabia or causes a supply side event in the Middle East will cause a sharp rebound in prices,” National Australia Bank commodity economist Ben Westmore said.

U.S. crude for April gained 59 cents to $98.57.

In Japan, operators of quake-crippled Fukushima nuclear plant dumped water on overheating reactors on Thursday while the United States expressed growing alarm about leaking radiation and urged its citizens to stay well clear of the area.

“There is so much uncertainty in Japan and its ability to drive economic recovery that it’s something that is casting a shadow on the outlook for global growth,” said Westmore.

“While that shadow lasts, it’s going to be difficult for oil prices to go higher. With risk aversion some money has come out of the oil market, and there is some aversion because the demand outlook remains so uncertain.”