London - Oil prices fell on Tuesday as a deepening nuclear crisis in Japan caused by last Friday's catastrophic earthquake and tsunami heightened risk aversion across financial markets.
A magnitude 6.2 earthquake hit eastern Japan on Tuesday, hours after the French Nuclear Agency said the country's nuclear crisis is equivalent to number six on the INES scale of nuclear accidents from one to seven. The 1986 Chernobyl disaster was a seven and Three Mile Island a five.
Panic buying broke out in Tokyo shops after explosions at two nuclear reactors sent a low-level radioactive wind towards the capital on Tuesday, although officials said radiation levels at the stricken Fukushima Daiichi nuclear complex had fallen after an earlier spike.
April Brent was down $5.28 to $108.39 a barrel at 1358 GMT, after earlier hitting a low of $107.88, last seen on February 23. US crude for April dropped $3.90 to $97.28 after slipping as much as $4.
"This is a massive risk off day today," said Christin Tuxen, analyst at Danske Bank. "The risk averse sentiment is coming through both in the equity market and euro/dollar. It's weighing on oil even though fundamental drivers should suggest an upside." At one point, Japanese stocks plunged more than 14%, heading for their biggest drop 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 during reconstruction.
The International Energy Agency (IEA) said on Tuesday 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.
Martial law in Bahrain
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 to help restore calm following weeks of protests by the island's Shi'ite Muslim majority.
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.
"We continue to see developments in Bahrain as an important touchstone for the rest of the region," said Barclays Capital analyst Amrita Sen. "It appears likely that the other governments are determined to contain unrest to Bahrain for fear of a heightened external influence in the region."
An opposition politician said a Bahraini man was killed in clashes with police and analysts said escalating violence in the Middle East would be likely to support oil prices.
In Libya, Muammar Gaddafi's forces bombarded two rebel-held towns as the battle for eastern Libya edged closer to the insurgent stronghold Benghazi, far outpacing diplomatic efforts to impose a no-fly zone to help the insurgents.
On the data front, markets were looking towards weekly US inventory numbers from industry group American Petroleum Institute. A Reuters poll indicated US crude oil stockpiles probably rose by 1.8 million barrels last week.