Brent edges down toward $109 ahead of Cyprus bailout vote

Brent eased toward US$109 a barrel on Tuesday as investors eyed a Cyprus vote later in the day on a bailout plan that revived concerns about the euro zone debt crisis, although losses were capped by a rosier economic outlook in the United States.

Cyprus will decide on Tuesday whether to go ahead with a controversial plan to impose a levy on bank deposits to secure a US$10bn euro bailout from the European Union. The proposal announced over the weekend broke calm in the euro zone and caused global markets and the euro to tumble on Monday.

The move sparked concerns of a run on banks elsewhere in the euro zone and worries that similar extraordinary measures might be taken if other indebted member states need funding help. Such a scenario would weaken demand for oil from the euro zone.

"It could set a precedent for how Europe is going to go forward," Tony Nunan, a risk manager at Mitsubishi Corp in Tokyo, said. "It's a cause of social instability."

Brent crude for May delivery was down 11 cents at$109.40 a barrel by 0524 GMT. It briefly hit a three-month low on Monday before settling 31 cents lower. US crude for April edged up 7 cents to US$93.81.

Global markets recovered on Tuesday as confidence was partially restored by news that the Eurogroup decided to give Cyprus more flexibility over a bank levy which is part of the bailout conditions.

"It's an over-reaction from a complacent investor crowd," Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong, told the Reuters Global Markets Forum.

"Expect oil prices to rebound once there are better economic headlines emerging from China and US. The ECB will make sure that this Cyprus contagion will not spread and is a one-off."

In the United States, investors eyed the Federal Reserve's policy meeting for any indication on whether it will scale back its very accommodative monetary stance as the economy is showing signs of improvement. Almost all US states began 2013 with lower unemployment rates than they had at the start of 2012, Labour Department data showed on Monday.

"It's impossible to stop quantitative easing now because the market is too fragile," Nunan of Mitsubishi Corp said, adding that terminating the bond-purchase programme will cause markets such as US crude futures to fall.

Investors will also watch for US oil inventories data due on Tuesday and Wednesday for a further fall in crude stocks at oil futures delivery hub Cushing, Oklahoma, that could strengthen West Texas Intermediate (WTI) prices against Brent.

"A Cushing stock draw will raise confidence that the glut in Cushing is alleviated," Nunan said. "The WTI/Brent spread is going to narrow in the long run."

Brent's premium to WTI for May is about US$15 a barrel, down from more than US$20 in February.

US commercial crude stockpiles are expected to have risen 2m barrels last week amid low refinery runs, a preliminary Reuters poll of analysts showed on Monday.

Distillate inventories likely fell 1.2m barrels, while gasoline supplies are seen down 2.5m barrels, the poll showed.