Brent slips towards $107 on potential Iran deal, economy concern

SINGAPORE (Reuters) - Brent crude slipped towards $107 on Wednesday as a potential deal between Iran and the U.N. nuclear watchdog eased fears of oil supply disruptions, while concerns over the debt crisis in the euro zone and a slowing Chinese economy weighed on demand.

The U.N.'s International Atomic Energy Agency expects to sign a deal with Iran soon to unblock investigations into suspected work on nuclear bombs in the oil-producing country, increasing the prospect of a resolution to a conflict over the issue.

Brent crude had dropped 74 cents to $107.67 a barrel by 0553 GMT and U.S. July crude had fallen 77 cents to $91.07, with economic concerns weighing as the World Bank cut its economic growth forecast for China, the world's second-largest oil consumer.

Nagging fears of a messy Greek exit from the euro zone also remained ahead of a Wednesday meeting of European leaders. Germany has dismissed a French-led call for euro zone governments to issue common bonds, cooling hopes the meeting would produce fresh measures to tackle the region's debt problems.

"Elections (in Greece) and the EU Ministers' meeting could potentially cause a lot of headline-driven movements in oil prices," said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp.

"The Greece situation is similar to Iran in the sense that it is going to drag out. With Greece in the euro zone, any changes will take time as the euro zone needs approval from parliament. It's a slow-moving train wreck."

Waning optimism about the summit drove shares, commodities and the euro down against the dollar, with the dollar index strengthening.

A stronger greenback can pressure dollar-denominated commodities such as oil by making them more expensive to consumers using other currencies.

The World Bank warned that Europe's seething debt crisis could inflict even bigger damage if it worsens, with sluggish U.S. and European demand and a softening Chinese property market combining to weigh on the Chinese economy in the near term.

It also cut its economic growth forecast for China this year to 8.2 percent from 8.4 percent previously, adding that a slowing China will drag growth in emerging East Asia to two-year lows this year.

HIGH OIL INVENTORIES

U.S. crude oil inventories rose 1.5 million barrels last week, industry group the American Petroleum Institute said in a report late on Tuesday, further hurting oil prices.

Ahead of weekly reports on U.S. oil inventories, crude stocks were expected to have risen 1.0 million barrels last week, a Reuters survey of analysts showed.

The EIA's weekly report is due on Wednesday at 1430 GMT.

Europe is also facing a glut of high quality crude oil grades, only a year after Libya created a serious shortage, as demand from the continent falls and the U.S. cuts imports due to greater domestic supply.

This has led to a steep weakening in values for many high quality sweet and low-sulphur grades, a rare development that suggests oil futures prices have room to correct further in an oversupplied market.

"In the short term, I'm quite bearish as ramped-up supply from Saudis and growing inventory in the United States shows the oil fundamentals are not that strong," said Nunan.

Increased production from Saudi Arabia, Iraq and Libya has helped push U.S. crude oil inventories to a peak and allowed Iran's customers to seek alternative barrels in the face of tightening sanctions on Tehran.

ECONOMIC RECOVERY HOPES

But hopes for fresh economic stimulus from China and a moderate economic recovery in Japan capped losses in oil prices.

Chinese media reported on Wednesday that Beijing will stick to active fiscal and prudent monetary policies in a bid to sustain relatively fast economic growth, quoting Vice Premier Li Keqiang.

This followed a report on Tuesday that China would speed infrastructure investments.

As widely expected, the Bank of Japan has kept monetary policy steady on Wednesday, maintaining its view that Japan's economy will resume a moderate recovery.

Also providing a bright spot, the latest data from U.S. showed the pace of sales of existing homes in April rose to its fastest in nearly two years and a falloff in foreclosures helped bring a surprise jump in prices.

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