Oil turns negative as optimism fades

LONDON (Reuters): Oil futures fell on Monday, erasing early gains after a victory for pro-bailout parties in Greece failed to ease concerns about the euro zone, and analysts said oversupplied crude markets would cope with any loss of Iranian oil.

Pro-bailout parties in Greece will form a government after a narrow election victory over the left that eased fears of a sudden exit from the euro.

But the possibility that other larger economies such as Italy and Spain may also need to be rescued remains a threat to the euro zone and is driving investors to reduce their exposure to risky assets.

“The economic outlook is upsetting people more than security issues around Iran, and they realise that nothing really has come out of Greece, except that the crunch may have been delayed for a while,” said Roy Jordan, an oil analyst at Facts Global Energy.

Investors fear the euro zone debt crisis will now hit Italy, one of the world’s biggest sovereign debtors, after spreading from Greece to Ireland, Portugal and Spain in recent months.

Leaders at a Group of 20 will be under pressure to produce a lasting solution to a debt crisis at a two-day meeting in Mexico.

Brent crude were down 10 cents at $91.51 a barrel at 0849 GMT, sliding from a one-week high of $99.50 a barrel hit early in the session. U.S. oil futures were down 21 cents at $83.82 a barrel around the same time, also off a one-week high of $85.60 a barrel hit in early trade.

A meeting between Iran and world powers in Moscow on Monday is unlikely to produce a swift resolution to a dispute over Iran’s nuclear program, and prevent an embargo on Iranian oil from taking effect on July 1, according to analysts.

“Iran’s two central goals, recognition of its right to enrich uranium and significant sanctions relief, will probably not be met - and on balance a deal will probably not occur in Moscow,” wrote Eurasia Group analysts in a note.

Iran also wants relief from intensifying economic sanctions, with and faces new U.S. and European Union sanctions in the next two weeks. In less than two weeks, Iran’s biggest oil buyers will lose access to the London-based insurance market that protects 95 percent of the world’s tanker shipments against oil spills or catastrophic collisions.

This unforeseen but ultimately critical side effect of EU sanctions to punish Iran for its nuclear program has so far provided little support for slumping crude oil markets.

Despite the imminent loss of Iranian oil, analysts and traders say the market is oversupplied as slowing economic growth and additional exports by Saudi Arabia outweigh the loss of Iran’s oil.

“Everyone is feeling a bit deflated and it is dawning on people that there is an awful lot of oil around and that this cut back is needed,” Jordan at Facts Global Energy said.

Brent futures have dropped by more than 20 percent since April, to trade below $100 a barrel for the first time since early 2011.