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Oil in for a whacking on Iran deal

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Negotiators may have missed Tuesday's deadline, but they could still reach a deal to lift sanctions on Iranian oil exports today, which would send prices further south, analysts say.

"An agreement would trigger an instant price dip for Brent oil, but of no more than $5," said IHS Energy Insight vice president Victor Shum said by phone. While "a deal would be a breakthrough, it will only add to the supply glut in the oil markets and, potentially, push Brent towards $30 a barrel."

Negotiators from Iran and six world powers on Tehran's nuclear program failed to meet a deadline on Tuesday that would have paved the way to lift United Nations sanctions on Iranian oil exports. But talks will continue in Switzerland today.

Brent oil prices slipped in Asia on Wednesday morning amid speculation that negotiators could reach a deal. Brent oil futures were quoted at $54.90, down 0.4 percent on the previous day.

"[The talks have a] 70 percent chance of success and we estimate Brent would drop $5 on the news," Societe Generale commodities analyst Michael Wittner said in a note published on Sunday.

Flooding an oil glut

The exact timing of when and how much of Iran's oil will come to market depends on the wording of any framework agreement and whether sanctions will be lifted in phases or, as Iran hopes, in one swoop, analysts said.

The United States, Britain, France, Germany, Russia and China, who have been locked in talks with Iran in Lausanne, want to see a gradual lifting of sanctions and will probably prevail, according to IHS's Shum.

But Iran is keen to starting collecting revenue on its oil storage reserves, which are estimated to have reached between 30 and 35 million barrels. The leakage could start quickly, which would only add to the existing and chronic oversupply of two million barrels a day, said Shum.

No relief on horizon

As if that were not enough supply for the markets to take, Iranian officials claim they can ramp up production by one million barrels a day, said Japan Oil, Gas and Metals National Corporation researcher Ito Mashino by phone.

"They are probably exaggerating – while there is no visibility on upstream development, Iran almost certainly needs extensive international assistance to boost production," she said.

Still, if and when Iran starts looking to produce at the pre-sanction two million barrels a day level, Saudi Arabia could respond by ramping up production to keep its market share, which could eventually push Brent towards $30 a barrel, said IHS' Shum.

"Saudi Arabia will fight to maintain its market share," he said.

Meantime, the annual refinery maintenance season will start in earnest from next month in Europe and Asia and will add to the already near-record buildup of inventories, in turn putting further selling pressure on oil futures, Shun said.

He sees Brent at the higher $40 range and West Texas Instruments futures at the lower $40 level by the end of the second-quarter.