Oil reversed early gains to fall by around $1 a barrel on Tuesday, after Iran's new President Hassan Rouhani said he was ready to enter "serious and substantive" negotiations over Tehran's nuclear program, reducing the geopolitical risk premium.
A 20% plunge in the cost of U.S. ethanol credits, which refiners must purchase to comply with environmental regulations, also pushed gasoline prices down 1.25 percent, triggering further losses across the oil complex.
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Oil exports from the Buzzard field in the North Sea, which form part of the underlying market for Brent futures, are set to resume on Tuesday easing concerns about short-term supply disruptions.
Brent crude was down 95 cents to trade at $107.77 per barrel by 10:23 a.m. EDT (1423 GMT), having fallen to a low of $107.63.
U.S. oil fell $1.06 to trade at $105.50 per barrel, having hit a low of $105.27 a barrel.
Gasoline futures took the heaviest losses, falling nearly 4 cents to trade around $2.91 a gallon after Renewable Identification Numbers (RINs) dropped as low as 80 cents, after having traded above $1 on Monday and as high as $1.50 just two weeks ago.
Traders said heavy selling had been triggered in RINs by a rumour the U.S. Environmental Protection Agency is set to announce the final rule for how much ethanol refiners must blend into gasoline for 2013, or the initial rule for 2014. EPA officials were not immediately available to comment.
Oil's decline was checked by news that Washington told U.S. citizens in Yemen to leave the country immediately due to the threat of potential attacks from militants. That pushed Washington to shut diplomatic missions across the Middle East, and to airlift some personnel from Yemen on Tuesday.
"The latest terror warning issued by the U.S. for North Africa and the Middle East are likely to preclude any sharper fall in prices," Commerzbank oil analyst Carsten Fritsch said.
Losses were also limited by expectations that U.S. crude and gasoline stockpiles fell last week.
A preliminary Reuters poll, ahead of weekly inventory reports from the American Petroleum Institute (API) and the U.S. Energy Information Administration, forecast a drop in crude stocks of 700,000 barrels in the week ended Aug. 2.
In the previous week, U.S. crude inventories rose 431,000 barrels to about 365 million barrels.
The API report is released at 4:35 p.m. EDT on Tuesday (2035GMT).