* Fall in U.S. crude volume deeper than for other assets
* Over quarter as a whole, oil volumes still on rising trend
* Implied volatility index hit highest this year last week
By Barbara Lewis and Susan Thomas
LONDON, March 23 (Reuters) - Traded volumes on oil and other industrial commodities markets have fallen despite high prices as dealers struggle to digest upheaval across the Middle East and devastation in Japan.
Volumes on equities have also retreated after a spike last week and activity on the New York Stock Exchange on Tuesday was the lowest this year.
Caution on the New York Stock Exchange on Tuesday saw volume of 6.5 billion shares, compared with a 30-day rolling daily average of 8.09 billion.
The impact on U.S. crude
Graphic on volumes for commodities, stocks, bond markets:
http://r.reuters.com/tas68r
"Events in Japan and the Middle East reduced liquidity and increased volatility across all the asset classes, regardless of any direct impact," said Patrick Armstrong, managing partner of London-based Armstrong Investment Managers, which oversees assets of just under $400 million.
Still, anticipating prices would rise, he bought copper this week and longer dated oil contracts last week.
"It's very volatile and to such an extent that the market volumes have deteriorated," said Steve Hardcastle, Sucden Financial's head of client liaison of London metals markets.
"Volumes generally have been good, but we're going through a period of huge uncertainty. It's an endless list of issues at the moment and so for all of those reasons, markets are extremely nervous."
The Chicago volatility index <.VIX>, a gauge of market uncertainty, on March 16 reached its highest this year, as traders factored in the implications of Japan's earthquake.
Oil prices have been choppy after Brent crude
Prices fell sharply after the Japanese earthquake and then rose again as the West started bombing raids in Libya.
"Volume in crude oil futures remains remarkably low compared to levels seen so far this year and in particular when considering the current geopolitical issues," said Olivier Jakob of Petromatrix.
"You try to price in the Middle East and then you have to re-price the nuclear risk of Japan. These two are great unknowns."
END QUARTER ALLOCATIONS?
With other commentators, he said traders could resume adding length, especially as they assess portfolio allocations ahead of the end of the first quarter.
The spread of popular protests across the oil-producing Middle East have added a "contagion risk premium" of roughly $10 a barrel, some analysts have said.
After some heavy trading days in February, U.S. crude volumes could still reflect a well-established rising trend for the quarter as a whole.
Some thought a turning point in trading activity could be imminent as key technical levels loom for industrial metals, where volatility has left some players sidelined.
"In the last week it's fallen back because the markets have been in no man's land, looking neither good nor bad because of events in Japan, in Syria and all over the Middle East and Libya," said Alex Heath, head of base metals RBC Capital Markets.
"I think the likelihood is that today we might well break that trend, only because a number of significant pivots have been breached technically."
In fundamental terms, Middle Eastern turmoil has limited implications for industrial metals, which are more exposed to short-term supply disruption from Japan.
Copper
In the immediate future, oil demand from Japan, the world's third largest user after the United States and China, will shrink and the disruption of supply chains will limit metal consumption.
Longer term, some of the lost nuclear energy is likely to be replaced with oil-fired generation and the reconstruction effort is also likely to stoke demand for industrial metals.