Oil climbs back above $106 as Iran talks stall

Iran accused world powers on Thursday of creating a difficult atmosphere that hindered negotiations on its atomic energy program, signaling a snag in diplomacy to defuse fears of a covert Iranian bid to develop nuclear bombs.

Brent futures rose 74 cents to $106.30 by 1042 GMT after earlier touching a high of $106.68 before weak Chinese and European economic data sparked a bout of selling.

U.S. crude for July rose $1.03 to a high of $90.93 after settling at $89.90 a barrel on Wednesday, the lowest close for front-month U.S. crude since October 21.

Investors are worried that failure to agree a deal over Iran's nuclear plans could lead to open conflict in the Middle East Gulf that could jeopardize oil supplies.

This has been one of only a handful of factors supporting oil prices at a time when the world economy is stuttering.

The apparent snag in the Iran nuclear talks tempered earlier hopes of success after a senior U.S. official suggested discussions were making progress.

The nub of the dispute was not immediately clear as the high-stakes talks continued in the Iraqi capital of Baghdad, but Iran has said it wants immediate relief from economic sanctions as part of any deal, a demand the West rejects.

Other than Iranian fears there is nothing to support prices even at current levels, said David Hufton, managing director of brokers PVM Oil Associates in London.

There is not just a huge overhang of physical crude but of the light, sweet grades usually in high demand.

DATA

Oil prices have dropped by around 20 percent over the last three months as the global supply balance has improved, inventories have risen and as the risk of a halt to exports from Middle East oil producers has diminished.

Chinese factory output faltered in May, figures showed on Thursday, as export orders fell to two-month lows, pointing to sluggish economic activity in the first half of the year and denting the outlook for oil demand.

The weak data from China followed a move by the World Bank to cut China's 2012 economic growth forecast.

Europe's economy, meanwhile, appears to be contracting.

The euro zone's private sector has sunk further into the doldrums this month as new orders shrivel, forcing firms to run down backlogs and slash workforces, surveys show.

And worryingly for policymakers, the downturn that started in smaller periphery members is taking root in the core countries of Germany and France, whose tepid growth had been keeping the troubled bloc afloat.

All the signs now point downwards, said Carsten Fritsch, commodity analyst at Commerzbank in Frankfurt. We see further declines in oil prices with Brent probably heading towards $100 per barrel.

Germany's manufacturing sector is shrinking at its fastest rate in three years, data showed on Thursday, renewing concerns about the stamina of Europe's largest economy.

And Britain fell deeper into recession than initially thought in the first quarter of 2012 due to a slump in construction output, data showed.

Energy demand, which tends to track economic activity, is almost certainly falling in Europe and growing more slowly than expected in some emerging economies, analysts said.

I think we can expect downward revisions in oil demand growth estimates as the latest economic figures are digested, said Commerzbank's Fritsch.