GLOBAL MARKETS-Oil drops on demand fear, Libya; stocks off

* Crude oil falls, Goldman Sachs advises taking profits

* US stocks mostly lower; Alcoa reports strong Q1 profit

* US dollar firmer after US government shutdown avoided
(Adds details, comment, updates prices)

By Wanfeng Zhou

NEW YORK, April 11 (Reuters) – Crude oil prices fell
sharply on Monday on concerns high prices could erode demand
and threaten economic recovery, while a sell-off in energy
shares and jitters about corporate earnings hit U.S. stocks.

Brent and U.S. crude oil also came under pressure earlier
after the African Union said Libyan leader Muammar Gaddafi had
accepted a road map to end the civil war, including an
immediate ceasefire, though rebels said any settlement would
require Gaddafi step down. For details, see [ID:nLDE7390JP]

Analysts were skeptical about the peace deal, and even if
an end to the civil war were in sight, it will be some time
before Libyan exports return to pre-conflict levels.

Goldman Sachs told clients there is a strong chance
commodity prices may reverse, recommending they take profits.
[ID:nN11303064]

“Not only are there now nascent signs of oil demand
destruction in the United States, but also record speculative
length in the oil market, elections in Nigeria and a potential
ceasefire in Libya that has begun to offset some of the upside
risk owing to contagion,” the investment bank’s commodity
research team, led by Jeffrey Currie, said in a note.

Brent crude oil for May (LCOc1: Quote, Profile, Research) ended $2.67 lower at
$123.98 a barrel, dropping as low as $123.62 after reaching a
32-month peak of $127.02. U.S. crude (CLc1: Quote, Profile, Research) fell $2.87 to
settle at $109.92, pulling back after reaching an early $113.46
peak, the highest intraday price since September 2008.

U.S. stocks ended mostly lower as falling oil prices
weighed on energy stocks and on fears that corporate earnings
may not justify a big run-up in equities.

But Alcoa Inc (AA.N: Quote, Profile, Research), the first Dow component to release
results, reported a large first-quarter profit on Monday, after
a loss a year ago as the price of aluminum, its primary
product, rose sharply with demand for the metal.

Profits in the first quarter of 2011 at S&P 500 companies
are seen rising 11.4 percent from a year ago, according to
Thomson Reuters data. For details, see [ID:nN07256466]

“There’s a question of whether companies can meet the
fairly optimistic expectations,” said John Carey, portfolio
manager at Pioneer Investment Management in Boston, which has
about $260 billion in assets under management. “There’s
potential for disappointment, but if they come in line or
above, the market could experience a continued rally.”

The Dow Jones industrial average (.DJI: Quote, Profile, Research) ended up 1.06
points, or 0.01 percent, at 12,381.11, but the benchmark
Standard & Poor’s 500 Index (.SPX: Quote, Profile, Research) fell 3.71 points, or 0.28
percent to 1,324.46. The Nasdaq Composite Index (.IXIC: Quote, Profile, Research) lost
8.91 points, or 0.32 percent to 2,771.51.

World stocks as measured by MSCI (.MIWD00000PUS: Quote, Profile, Research) were down
0.2 percent, with emerging markets (.MSCIEF: Quote, Profile, Research) off 0.6 percent.
European stocks fell, with the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index
of top European shares down 0.2 percent.

The International Monetary Fund said on Monday it did not
believe that rising commodity prices will derail the global
economic recovery but warned that inflation will remain
elevated for a while.

DOLLAR’S GAINS LIMITED

The U.S. dollar firmed against the euro after the U.S.
Congress on Friday reached a last-minute federal budget deal
that avoided a government shutdown. However, a focus on the
U.S. debt ceiling debate could limit any gains, traders said.

A rebound in the dollar was also overdue after it fell
sharply against the euro on Friday continuing its downtrend of
the past four months. For the month of April, the dollar was
still down about 2.0 percent.

On Monday the euro (EUR=: Quote, Profile, Research) fell 0.4 percent to $1.4426,
after hitting a 15-month high around $1.4486 on Friday.

“The euro’s drop is nothing more than white noise and the
pullback should prove shallow,” said Jessica Hoversen, foreign
exchange and fixed income analyst at MF Global in New York.

Hoversen said the dollar’s negative tone should continue as
long as the Federal Reserve keeps interest rates low and while
central banks abroad, namely the European Central Bank and Bank
of England, move closer to more normal borrowing costs.

Expectations of another rise in European Central Bank
interest rates by July kept the euro close to recent highs and
pushed euro zone government bond prices lower. German Bund
yields (DE10YT=TWEB: Quote, Profile, Research) briefly rose above 3.5 percent for the
first time since August 2009.

The yen was off an 11-month low against the euro and a
2-1/2-year trough versus the Australian dollar as another
earthquake in Japan led some investors to close riskier bets
funded by cheap borrowing in the Japanese currency.
(Additional reporting by Ryan Vlastelica, Julie Haviv and
Gertrude Chavez-Dreyfuss, Gene Ramos and Robert Gibbons;
Editing by Andrew Hay)

GLOBAL MARKETS-Oil drops on demand fear, Libya; stocks off