Oil Slips on Possible Iran Deal, Strong Dollar

An Iran nuclear deal could bring new oil supply; more price falls seen as U.S. stocks are sold off.

Oil prices fell on Monday as officials from Iran and six world powers discussed a possible deal over Tehran's nuclear programme that could bring an end to sanctions and allow an increase in Iranian oil exports.

The two sides have until the end of Tuesday to come up with an agreement at talks in Lausanne, Switzerland.

Officials close to the talks have said progress has been made and many investors believe a deal is in the making. Few expect the talks to end without some sort of agreement.

"Regarding Iran, there are two possible outcomes: a framework deal or an extended deadline," Bjarne Schieldrop, chief commodities analyst at SEB Markets in Oslo, told the Reuters Global Oil Forum.

Brent crude was down 25 cents at $56.16 a barrel by 1250 GMT as the market began to price in a deal with Iran. U.S. crude was down 40 cents at $48.47.

Oil markets are well supplied and recent figures show global production outstripping demand by around 1.5 million barrels per day (bpd), filling oil inventories.

"Further downward pressure may come at any time from a nuclear agreement with Iran," said Michael Wittner, analyst at Societe Generale (SGE.SG). "If a framework agreement is reached, we would expect an immediate bearish knee-jerk reaction in the markets, with oil prices quickly losing on the order of $5."

Barclays (BCS) said a build in U.S. stocks would make its way into an oversupplied global market in the second quarter and that demand would unlikely be strong enough to support oil prices once that happened.

"Continued dollar strength is (also) a headwind to the oil price recovery," Barclays said, forecasting the dollar would rise above parity with the euro by the fourth quarter of 2015.

Few investors expect the Organization of the Petroleum Exporting Countries, which pumps around a third of the world's oil, to restrain production to help push up prices.

Oil producers are much more focused on maintaining market share, analysts say.

Lower oil prices have encouraged some oil and gas companies to stop drilling, particularly in the United States, but this is unlikely to affect oil production until later this year.

"The current rig count is pointing to U.S. production declining slightly sequentially in 2Q15 and 3Q15," Goldman Sachs said, adding that activity could bounce back in 2016 as drillers benefit from falling production costs.

By Christopher Johnson