LONDON – Oil dropped on Wednesday after Washington said it would talk to major OPEC producer Iran and forge a "new and positive" relationship — provided it stopped uranium enrichment.
A long-running dispute between the West and Iran over Tehran's nuclear ambitions has stoked prices above $70 as investors fear potential supply disruptions from the world's fourth-biggest oil exporter.
"If the U.S. were to get involved in even indirect dialogue, it would result in a significant decrease in tensions," said Nauman Barakat of investment bank Macquarie in New York.
U.S. crude settled down 74 cents to $71.29 a barrel after dropping as low as $70.05, while Brent crude dropped 64 cents to $70.41.
But some analysts said the downturn may be short-lived.
"Today's price action aside, there has been constructive news from the two key demand countries: the United States and China," said Michael Wittner of investment bank Calyon.
With oil's four-year rally still intact, a pledge by the Organization of Petroleum Exporting Countries to keep pumping flat-out rang hollow with investors, who fear a vicious U.S. hurricane season could damage refineries and create another gasoline supply crisis.
OPEC ministers meet in Caracas on Thursday.
"The OPEC meeting is a nonevent. The market has priced in no change," Wittner said. "But the official start of hurricane season is June 1 and that's on the back of the minds of market participants."
Noted U.S. storm forecaster William Gray said there could be five "major" hurricanes — ones with sustained winds above 110 mph (177 kph) during the Atlantic hurricane season, which officially begins on Thursday.
OPEC ministers admit the 11-member group, which controls a third of world production, has been left powerless to control prices by a global shortfall in refining capacity and geopolitics.
"OPEC is becoming an audience," said Qatari Oil Minister Abdullah al-Attiyah.
But Iran, the group's second-biggest producer, has become a major player in world politics as it pursues a nuclear program the West fears may allow it to build an atomic bomb.
In a policy shift toward a long-time enemy, U.S. Secretary of State Condoleezza Rice said on Wednesday the United States would join three European Union powers in negotiating with Iran, if Tehran suspended its nuclear enrichment.
Washington's move came as senior officials from major powers prepared to meet in Vienna on Thursday to approve incentives for Iran to not pursue nuclear technology with arms potential.
Iran says its nuclear program is purely for producing energy.
Dealers' attention will shift on Thursday to supply data from the world's top consumer. U.S. gasoline stockpiles were expected to have risen by 1.1 million barrels last week, a fifth consecutive build, a Reuters poll showed.
The data will be released a day later than usual due to Monday's holiday, which marked the start of the U.S. summer driving season, when gasoline demand peaks.