Crude oil fell towards $109 a barrel on Monday after an unusual bank bailout proposal for Cyprus threatened to trigger fresh turmoil in the euro zone.
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.
A proposal that Cyprus would tax depositors as part of its 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.
Brent futures fell $2.04 per barrel to a low of $107.78 a barrel before recovering to trade around $109.26 by 1500 GMT. U.S. oil lost 26 cents to $93.19. 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.
“The bailout conditions for Cyprus, specifically the unprecedented removal of funds from depositors’ accounts, is sending share and commodity prices lower,” said Tamas Varga, oil analyst at oil brokers PVM Oil Associates in London told Reuters. “This step is causing shivers throughout the financial world, and it has created the fear that a reaction in other peripheral eurozone countries could hit the whole banking sector in Europe,” Varga added.
Cypriot ministers were trying on Monday to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island’s financial rescue or could lead to its default, with reverberations across the euro zone.