Oil falls below $110 as Ukraine worries ease

LONDON Tue Mar 4, 2014 7:14pm IST

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LONDON (Reuters) - Oil fell towards $109 on Tuesday as Russian President Vladimir Putin made remarks apparently intended to ease East-West tension over fears of war in Ukraine.

Russia seized Ukraine's autonomous Crimea region at the weekend, and the United States and the European Union have threatened sanctions if Moscow does not withdraw its troops.

April Brent crude briefly fell more than $2 soon after Putin's remarks, but had recovered slightly to be down $1.56 to $109.64 a barrel by 1305 GMT. It ended the previous session at its highest close this year.

U.S. crude for April delivery fell as low as $103.30, after reaching a 5-1/2-month high at $105.22 on Monday. The contract was down $1.22 at $103.70.

In his first public comments since the crisis began, Putin told reporters that Russia saw no need to use military force in the Crimea region of Ukraine for now, hours after the Russian army ended its war exercises along its border with Ukraine.

"The news conference sends the signal of further de-escalation of the situation. It looks like there's no intent to send more troops to Ukraine which explains the drop in price," said Carsten Fritsch, analyst at Commerzbank in Germany.

"Of course he kept the door open for further military measures if necessary so it's not a complete backdown."

Putin reserved the right to use all options in Ukraine to protect compatriots living in "terror" and skirted questions about Russian servicemen taking control of the Crimea region, saying armed men who seized buildings were local forces.

SUPPLY THREAT

This prompted fears that supply from Russia, the world's second-biggest crude oil exporter, could be disrupted or subject to sanctions.

Putin's statements on Tuesday raised investors' hopes, however, for a peaceful resolution with Ukraine, with Asian and European equities turning higher and commodities such as oil and gold falling.

Imports of Russian oil are so crucial for Europe that it is unlikely sanctions will be imposed, said Seth Kleinman, head of energy research at Citi.

"As this dispute now puts a question mark over about 50 percent of northwest Europe's crude imports, a rise in the risk premium is justified," he said.

"But Russia is such a critical supplier of oil and gas to Europe and the world that the odds of sanctions impacting these flows remains small."

Russia paid a heavy financial price on Monday for its military intervention in Ukraine. Stocks, bonds and the rouble plunged as investors dumped riskier assets in favour of commodities such as gold and oil.

In the gas market, a mild winter and improved infrastructure mean Europe and Ukraine are less reliant on Russian supplies than in past years, easing worries that the crisis in Ukraine could lead to shortages.

Investors were also looking to weekly U.S. oil inventory data later on Tuesday and on Wednesday to assess demand in the world's largest oil consumer.

U.S. commercial crude oil inventories are expected to have risen by 1 million barrels on average last week, while stockpiles of refined oil products probably dropped, a preliminary Reuters poll of five analysts showed.

The American Petroleum Institute will release its data on Tuesday at 4:30 p.m. EST (2130 GMT). The government's Energy Information Administration will publish its data on Wednesday at 10:30 a.m. EST (1530 GMT).

(Additional reporting by Florence Tan in Singapore; editing by Jane Baird and Keiron Henderson)

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