Oil prices tumbled on Monday as Iran and six world powers closed in on a final nuclear deal that would end sanctions on the Islamic Republic and let more Iranian oil on to world markets.
News of a unanimous agreement by European leaders on a bailout loan for Athens, which should allow Greece to stay in the euro zone, helped pare early losses.
Brent crude for August fell $1.89 to a low of $56.84 a barrel before rallying back to around $57.70 by 0725 GMT.
U.S. light crude, also known as West Texas Intermediate (WTI), was down 90 cents at $51.84 a barrel.
Iran and six world powers are reportedly on the brink of finding a nuclear deal that would bring sanctions relief in exchange for curbs on Tehran’s nuclear programme.
The possibility of Iran adding to a global oil surplus when the demand outlook could potentially weaken given a slump in China’s equity markets, led several analysts to say crude would fall further.
“An Iran nuclear deal is planned for Monday, which is not yet in our base case forecast,” Morgan Stanley said.
“If true and successful, U.S. production growth may not be needed until 2017, keeping 12-18 months deferred WTI
prices under $70 a barrel. Similarly, under such a scenario, Brent could remain range-bound below $70 through 2016.”
Oil prices pared early sharp losses after European Council President Donald Tusk said euro zone leaders had “unanimously reached agreement” on a deal for Greece.
But the oil market remained bearish.
“Implementation risks remain, and a possible nuclear deal with Iran should limit the upside,” said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt.
Although analysts say it would take until 2016 before Iran would be able to return to full-scale exports, most estimate that a jump of around 200,000 barrels per day in exports could be seen in the short term, adding to a current surplus of about 2.6 million barrels a day.
With oversupply ongoing and abundant economic risk, several banks have lowered their oil price forecasts.
Bank of America Merrill Lynch said U.S. crude prices “could soon drop well below our $50 per barrel target in 3Q15”.
Commerzbank said a fall below $55 per barrel in Brent and below $50 per barrel in U.S. crude was “conceivable”.