Brent-WTI gap may narrow on Iran

Brent crude may fall this week as tensions between Iran and the West ease further, raising expectations that the OPEC producer may be close to re-entering the export market.

A pullback in Brent may help narrow the premium with its U.S. counterpart West Texas Intermediate (WTI) crude futures - which currently stands at just under $11 a barrel - to between $5-7/barrel, according to UBS.

In a November deal with the United States, France, Germany, Britain, China and Russia, Iran agreed to suspend its most sensitive nuclear activity in exchange for a limited easing of sanctions that are battering its oil-dependent economy.

(Read more: How the 'rampant' US is setting global oil supply for 2014)

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Yukiya Amano, head of the International Atomic Energy Agency said on Friday there was "still a long way to go" to resolve a decade-old dispute over Iran's nuclear program, a note of caution days after Tehran curbed its atomic activity under an interim deal with world powers, Reuters reported.

"The Iranian talks are going smoothly and even if the U.S. doesn't give in too much, we think it will give in to countries that deal with Iran and that's all we need right now for Brent to come off," said Carl Larry, president of Houston-based consultancy Oil Outlooks and Opinions

But not everyone in the market is confident about the early return of Iranian crude.

"The Iranian oil is still a long way off returning to market so do not expect this to be priced in yet, but this will be in the back of traders' minds and we monitor headlines closely," said David Nevin, a London-based energy broker with Tower Broking. A move above $108.42 for Brent would be bullish, Nevin said, and the benchmark may next target $109.50 and $110.20.

(Read more: Oil price caught up in fallout from Iran nuclear deal)

'Tread Lightly'

WTI prices, meanwhile, are expected to draw support from pipeline capacity additions in the U.S. aimed at draining a glut of oil at the WTI delivery point in Cushing, Oklahoma.

"Higher competition of domestic U.S. crude oil supply versus imports is possible due to improved transportation capacity from Cushing to the Gulf of Mexico (via Keystone XL Gulf and Seaway Twin pipelines) in 1H14," UBS strategists Giovanni Staunovo and Dominic Schnider wrote in comments emailed to CNBC on Saturday.

Exactly half of the respondents in CNBC's latest poll of oil market sentiment (10 out of 20) believe prices will fall this week. A quarter (5 out of 20) expect prices to gain while the remaining five respondents say oil will trade at current levels.

Oil markets may sideline the internal dynamics of the competing benchmarks this week and instead focus on the current spasm of emerging market turmoil fueled by a slowdown in China's economic activity and expectations that the Federal Reserve will continue cutting bond purchases at a monthly rate of $10 billion of taper.

(Read more: Fight in Iraq has oil traders holding their breath)

"Unless emerging market currencies stabilize, I find it unlikely crude will not experience some pressure to the downside and retest $95," said Kirk Howell, portfolio manager at Allston Holdings.

"It will be a heavy news week with the Fed and a number of 'known-unknowns' - issues like China's credit problems and Argentina's dwindling reserves are seemingly coming to potential inflection points all at the same time," he added. "Therefore, I think it is a week to tread lightly,"

— By CNBC's Sri Jegarajah. Follow him on Twitter @cnbcSri