Oil: World powers weigh Iran nuclear reply

Oil fell more than 2 per cent on Wednesday as world powers studied Iran's offer of more talks to resolve a nuclear dispute that could lead to sanctions against the fourth largest oil exporter.

An unexpected rise in stockpiles of petrol and heating fuel in the United States added further pressure.

US crude was US$1.60 lower at US$71.50 a barrel by 1623 GMT, while London Brent crude dropped US$1.45 to US$71.79.

Iran said its reply on Tuesday to a package of incentives proposed by the six world powers contained ideas that would allow serious talks, but it was unclear whether the response would avert United Nations sanctions.

"The risk to the market is to the downside, since the market has factored in Iran being intransigent," said Michael Coleman, managing director of Singapore-based hedge fund Aisling Analytics.

The UN Security Council has demanded Iran halt its nuclear work by a deadline of Aug. 31 or it could face sanctions, which traders fear could lead Iran to disrupt oil supplies.

There has been no sign Tehran would agree to the demand to halt uranium enrichment, although one EU diplomat said Iran might accept suspension while negotiations took place.

US INVENTORIES

Petrol stockpiles in the world's top consumer rose unexpectedly last week and distillate fuels jumped as refiners ran harder, the US government said on Wednesday. Crude oil inventories fell less than expected.

Relatively healthy supply levels as well as a cease-fire between Israel and Lebanon, which eased the threat of violence spreading in the oil-producing Middle East, has helped to lower prices from a record of US$78.65 hit earlier this month.

But the market is still concerned about the shut in of at least 508,000 bpd, or about a sixth, of Nigeria's output capacity because of militant attacks and pipeline leaks.

On Wednesday, the president of the Petroleum and Natural Gas Senior Staff Association of Nigeria said oil workers' unions might pull all members from the Niger Delta over safety fears following a spate of abductions by militants and a military crackdown.

Traders were also keeping an eye on Tropical Storm Debby, the fourth of the US 2006 hurricane season.

But forecasters were predicting it would not threaten oil and gas infrastructure in the Gulf of Mexico, where hurricane devastation last year sent oil prices to then record highs.

The Organisation of the Petroleum Exporting Countries meets next month in Vienna to reconsider its output policy.

The signs are the group will leave output unchanged.

"From now until the meeting, we are going to watch the market and then we can decide, but I don't think what is taking place in the market indicates any cut," Shokri Ghanem, head of Libya's national oil company, told Reuters on Wednesday.

- REUTERS