SINGAPORE: Brent crude dropped as much as $3 a barrel on Monday as supply fears eased following a breakthrough nuclear deal between world powers and Iran over the weekend.
Tough sanctions against Iran in the past two years have slashed exports from the OPEC member by more than half and cost Tehran billions of dollars in revenue losses a month, keeping Brent above $100 a barrel despite weak global demand.
The deal halts Iran's most sensitive nuclear activity and also suspends sanctions by the United States and the European Union on several other sectors of Iran's economy for an initial six-month period.
"What really concerns the market is what will happen after the six-month period, when more Iranian crude could flood the markets," said Chee Tat Tan, investment analyst at Phillip Futures in Singapore.
Brent was trading down $2.38 at $108.67 by 0823 GMT, its biggest daily drop in more than three weeks, after slipping $3 to hit a low of $108.05 earlier in the session. U.S. oil fell $1.34 to $93.50.
"When the U.S. market opens, we expect a further fall in Brent and to a lesser extend in WTI," Tan said, predicting Brent prices may drop to around $107 this week.
Others said a further drop in oil is unlikely until more details emerge on the agreement, with major factors influencing the market such as worries over when the United States will curb its monetary stimulus and outages in Libya.
"Prices are reacting to the historic deal because it takes some of the risk premium out," said Ben le Brun, a market analyst at OptionsXpress in Sydney. "But this news is hot off the press, and so there is some knee-jerk reaction. Oil may not fall much from here and we may see some paring back of losses."
The relief, which the U.S. State Department said is "limited, temporary, targeted and reversible", would allow about $4.2 billion of revenue from oil sales to be transferred in instalments from accounts frozen in the West if Iran fulfils its commitment.
Apart from the revenue loss from reduced oil exports, Iran has billions of dollars stuck in banks in countries which buy its oil because the sanctions have cut off transfer facilities.
The White House estimates that Iran has lost more than $80 billion since the beginning of 2012 because of lost oil sales. It also estimates Tehran's earnings over the next six months will be $30 billion down compared with a six-month period of 2011, before sanctions were imposed.
A tough road now lies ahead for President Barack Obama and other global leaders to turn the interim accord with Iran into a comprehensive agreement.
"Key groups remain suspicious of the reset in relations and contend that the Iranians got the much better end of the Geneva deal," Barclays analysts said in a note to clients.
Israeli Prime Minister Benjamin Netanyahu denounced the deal as a "historic mistake". Obama also has to sell the accord to sceptics in Congress, including some in his own Democratic Party, who have been pressing for more sanctions on Iran.
OUTLOOK
Oil prices may however find a floor as sanctions that prevent energy companies from investing in Iran, and have slashed its oil exports to around 1 million barrels per day (bpd) from 2.5 million bpd, remain in place.
Lower oil shipments from Libya will also underpin prices.
The country's oil exports, which remain disrupted by protesters seizing shipping ports, have been running at a fraction of the levels seen earlier this year of more than 1 million bpd.
Investors are now eyeing a raft of housing reports from the United States to gauge the country's economic outlook. The Fed's last policy meeting suggest officials are preparing to reduce the pace of bond-buying in coming months as long as the economy continues to improve.
The Fed's massive asset-purchase programme has been a key driver of investment in global commodities. (Reuters)
