Oil holds above $107 as Cyprus bailout deadline nears

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Oil prices held steady above $107 a barrel but were headed for a second week of losses on Friday as the lack of a solution to the financial crisis in Cyprus loomed over investors.

Russia turned down appeals for aid, leaving the island to strike a bailout deal with the European Union by next week or face a collapse, with potential knock-on effects for others in the euro zone and ultimately for oil demand.

Providing a glimmer of encouragement, however, the Cyprus Presidency said it had agreed with Greece on a takeover of the Greek units of Cypriot banks.

Oil prices turned higher while the euro rose to a session high after the announcement.

Abhishek Deshpande, an oil markets analyst for Natixis in London, said both Brent and U.S. crude were reacting to headlines on a potential Cyprus bailout deal.

"It is not Cyprus, it is the sentiments that Cyprus is sending, the fact that situation in Europe is far from over," Deshpande said.

Brent crude for May delivery was up 14 cents at $107.61 a barrel by 1135 GMT, but still looked set to post a fall of close to 2 percent this week.

U.S. crude for May was at $92.90, up 45 cents, also heading for a weekly decline.

Some analysts said the reaction to the crisis in Cyprus was overblown and other fundamental factors had contributed to recent falls in the oil market.

"Rising North Sea supply, the resumption of exports in South Sudan and the exit of financial investors," said Carsten Fritsch, an analyst at Commerzbank, listing reasons why the outlook for oil appeared weaker.

Industry sources said the supply of crude that sets the global Brent benchmark was expected to grow more swiftly than expected with shipments being brought forward due to strong output rates in the North Sea.

And state media said Sudan has ordered oil firms to prepare to start receiving South Sudanese crude exports again after the two countries signed a deal this month.

"The (exit of financial investors) might be attributable to Cyprus to some extent. But all this Cyprus fear is overdone. Look at stock markets, which have shrugged that off," Fritsch said.

While shares in Europe were heading for the steepest losses since November, Fritsch noted the dip in stock markets was dwarfed by gains made in previous weeks.

BRENT-WTI

Declining morale in the euro zone, rising North Sea crude supply and a shrinking oil glut at Cushing, Oklahoma, have helped pull Brent's premium to U.S. crude futures below $15 a barrel, the lowest since mid-January.

"Brent is obviously under greater pressure because it's closer to the epicentre of the issue," said Jonathan Barratt, chief executive of Sydney-based commodity research firm Barratt's Bulletin.

Europe's oil demand would be conditional on the outcome of the Cyprus issue, Barratt added.

"It only makes sense that the spread come in," Barratt said.

In another indication optimism about the euro zone is weakening, German business morale fell in March, breaking a four-month run of gains on Friday.

Among factors supportive of U.S. crude, inventories at Cushing fell 286,000 barrels last week while economic indicators such as jobless claims and housing data continued to suggest the economic recovery was on track.

Geopolitical tensions meanwhile have continued to support oil, as the standoff between the West and Iran has kept alive fears a dispute over the latter's nuclear programme could escalate and disrupt oil supplies.

Iranian Supreme Leader Ayatollah Ali Khamenei warned on Thursday the Islamic Republic would destroy the Israeli cities of Tel Aviv and Haifa if its nuclear infrastructure came under attack from the Jewish state. (Additional reporting by Florence Tan in Singapore; Editing by Anthony Barker)



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