BUY OR SELL-Sell oil for now, start buying for 2013
* Potential to buy in 2013 and roll into backwardation
* Liquidation on Tuesday stretches along the curve
* Brent more vulnerable to Japan effect
By Barbara Lewis
LONDON, March 15 (Reuters) - Japan's deepening nuclear crisis triggered a deep sell-off in oil that weakened contracts far down the price curve, while some participants saw a case for cautious buying particularly in 2013.
Traders had built up record long positions in U.S. futures in the week to March 8 as a wave of unrest across the Middle East stoked concern supply disruption, which has already halted OPEC member Libya's exports, could spread. [ID:nN11188551]
Prices reached a 2-1/2 year high of nearly $120 a barrel for Brent LCOc1 last month.
They have since fallen by nearly $10, or 9 percent, and selling has gathered momentum as fears mount of a nuclear catastrophe in Japan, the world's third largest oil user, following last week's earthquake. [ID:nLDE72D2FT]
At what point is it safe to start buying?
Patrick Armstrong of London-based Armstrong Investment Managers, which oversees $220 million in assets, said he planned already to start buying U.S. crude futures CLc1 for April 2013 and then roll into the backwardation that emerges at that point of the curve. <0#CL:>
On Tuesday, heavy selling wiped several dollars off contracts all the way to the end of next year.
U.S. crude had already been weakened relative to Brent by oversupply in Cushing, Oklahoma.
Weakness in the U.S. price, reflected in deep contango -- a market condition in which prompt contracts are cheaper than those for later delivery and is the opposite to backwardation -- should ease following the addition of extra tank capacity at Cushing, the delivery point for the U.S. benchmark futures contract. [ID:nN04237140]
Armstrong further based his view of strengthening U.S. crude on his expectation of further stimulus.
"There also may be a huge stimulus package if Japan starts to have an impact on the global economy," he said.
U.S. financial stimulus last year was one of the triggers for a wave of commodities buying.
Rob Montefusco, a London-based oil trader at Sucden Financial, also saw the case for buying later.
"It's not really going on right now, but it's the right play," he said.
A trader who asked not to be named said he could be a buyer on Brent, but not until the market fell further.
"The market will do $106/$108 and then my assumption will go back to $120, so I'm a buyer at $106," said the Geneva-based futures and options trader.
Another trader who also requested anonymity saw a case for buying contracts for December this year or January and February on Brent, but only cautiously.
"You could get a small position and build from there," he said.
He planned to stay away from U.S. crude for the foreseeable future, although he saw the scope for Brent as the more international benchmark to be more affected by Japan's troubles than U.S. crude.
Major forecasters have begun revising lower their forecasts for demand because of high prices.
The Paris-based International Energy Agency on Tuesday trimmed its forecast for 2011 oil demand growth by 10,000 barrels per day (bpd) to 1.44 million bpd from its estimate last month. [IEA/M]
The biggest recorded earthquake in Japan initally raised expectations demand for oil would shrink in the near term, but rally once reconstruction got under way.
On Tuesday, traders began revising expectations of any early recovery in Japanese demand as the focus switched to nuclear explosions and radiation leaks.
"The situation in Japan is so volatile. Yesterday, we were looking at a few nuclear plants being down. That was bullish for distillates and fuel oil," said Olivier Jakob of Petromatrix.
"Today, we don't know if we're just going to be in a situation where nuclear power plants are down or whether we have a nuclear accident. It's a bit difficult right now to be clear which scenario will develop." (Additional reporting by Dmitry Zhdannikov and Veronica Brown; editing by James Jukwey)
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