Oil falls as Libya calls truce

Oil prices slipped on Friday after two days of gains, as Libya declared a cease-fire, easing for the moment the threat of a Western air attack that could escalate the conflict and further damage oil facilities. Oil closed out a volatile week with yet another day of sharply below-average trading activity, as dealers remained reluctant to place big bets in the face of Japan's ongoing nuclear crisis and doubts that Muammar Gaddafi's truce would bring any swift resolution to the month-long rebellion.
Another increase in China's rate reserve requirements as well as continued unrest in countries bordering top oil exporter Saudi Arabia further clouded the picture, keeping implied volatility levels near their highest since June. Brent crude futures for May delivery fell 97 cents to settle at $113.93 a barrel, falling sharply from an earlier $117.29 peak after Libya's foreign minister declared "an immediate stop to all military operations."
Despite Friday's price drop, Brent crude ended the week up nearly 1 percent, after Japan's earthquake a week ago pressured prices. US crude futures for April delivery fell 35 cents to settle at $101.07 a barrel, off their high of $103.66, but finding support just above the $100-a-barrel level. US crude dipped only 9 cents from the prior week.
But trading volume was below 600,000 lots for the third time this week and only the fifth time this year, underscoring the deep uncertainty facing the market. Traders have liquidated around 5 percent of their positions since last Friday, when open interest in US crude reached a record 1.6 million lots.
Prices partly pared losses after President Barack Obama warned Gaddafi to comply with UN demands for a no-fly zone or else face consequences that include military action, echoing comments from France and Britain that came amid reports of continued attacks on rebel-held towns..
"This does not mean we are near a resolution of the situation in Libya. We may be facing the possibility of an entrenched status quo between pro- and anti-Gaddafi groups," said Harry Tchilinguirian, an analyst at BNP Paribas. "This only maintains the uncertainty in terms of when we will eventually have a full resumption of production in Libya."
While Libya's conflict pushed markets around, unrest in the Middle East also provided uncertainty. Yemen's president declared a state of emergency after at least 25 protesters were killed at an anti-government rally. Implied volatility, a gauge of how much prices are likely to fluctuate based on options trading, spiked as the Libyan conflict erupted a month ago, and has remained elevated since then. At-the-money volatility stood at just above 40 percent on Thursday, just off a peak 42.7 a week ago.
Oil prices came under pressure earlier in he day after China's central bank said it would raise lenders' required reserves, another move to rein in inflation that could dampen oil demand. Japan's earthquake and tsunami a week ago, and the resulting nuclear reactor crisis, caused oil prices to ease some, after unrest in the Middle East and North Africa drove oil prices to a 2-1/2-year highs, with Brent nearing $120 last month.