Oil falls on euro zone worry, eyeing Iran

A Chinese-built drilling rig known as Scarabeo 9, is seen lit up off the coast of Havana January 22, 2012.

NEW YORK (Reuters) - Oil prices fell on Monday as stalled negotiations on a deal to restructure Greece's debt revived concerns about the economy while the risk that Iran might quickly halt crude exports to Europe limited losses.

The dollar index .DXY strengthened and the euro fell from a six-week high against the U.S. currency as talks on a Greek debt agreement continued, keeping investors cautious about the outlook for the economy and oil demand. <USD/>

European shares closed at a two-week low and U.S. stocks eased on the heightened concerns about the state of Europe's finances as Greece and Germany sparred over budget measures for Athens. .N

Further pressure on crude came as U.S. gasoline futures dipped on news a gasoline-making unit at the East Coast refinery returned.

Trading was volatile and while Iran did not act to ban exports to the EU over the weekend as some had feared, the possibility Tehran may yet halt exports to the EU, along with data showing improved European economic sentiment and a successful bond auction in Italy, helped limit oil's losses.

"Today's downdraft was largely explained by a renewed risk-off trade that saw both the euro and the equities slide," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note.

"The complex was also forced to disgorge some Iranian risk premium given the delay by Iran in voting on a cessation of exports toward Europe," Ritterbusch added.

Brent March crude fell 71 cents to $110.75 a barrel,

having traded from $110.25 to$111.78. The intraday peak was in sight of front-month Brent's 200-day moving average of $111.89.

U.S. March crude fell 78 cents to settle at $98.78 a barrel, trading from $98.43 to $100.05, and closing below the front-month 50-day moving average at $99.27.

Crude trading volumes were light, with Brent and U.S. turnover under 500,000 lots and below 30-day averages.

U.S. gasoline futures fell nearly 2 percent, pressured by ConocoPhillips' (COP.N) restart on Sunday of a gasoline-making unit at its Bayway refinery in New Jersey.

Gasoline futures jumped more than 8 cents on Friday on news the Bayway unit had shut down to address a mechanical failure.

Front-month February U.S. gasoline and heating oil contracts expire on Tuesday.

IRAN TO EU EXPORTS NOT CUT, YET

Crude oil prices eased after an expected Iranian parliamentary vote proposing the immediate suspension of crude exports to the European Union did not go ahead on Sunday.

Lawmakers had raised the possibility of turning the tables on the EU, which will implement its own embargo on Iranian oil by July as the West tightens sanctions on Iran because of Tehran's nuclear program.

The EU's ban on importing Iranian oil will add upward pressure to oil prices, Abdullah al-Badri, OPEC's secretary general said on Monday, even though there is no shortage of oil on the market.

Saudi Arabia said it could continue to meet oil market shortages because of its investments in maintaining production capacity. Oil Minister Ali al-Naimi also said that rising natural gas output means crude oil exports will not be affected by booming domestic demand for energy.

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For a graphic on euro zone confidence data:

link.reuters.com/bas36s

Timeline on Sudan, S.Sudan link.reuters.com/cex79r

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U.S. consumer spending was flat in December, the weakest reading since June, government data showed, as households held on to the largest rise in income in nine months, potentially signaling slower consumption early in 2012.

But confidence in the euro zone's economy strengthened in January for the first time since early 2011, according to the European Commission's economic sentiment indicator, more supportive news for oil.

Also supportive, Italy's longer-term borrowing costs fell to just above 6 percent, their lowest since October.

U.S. OIL INVENTORIES

U.S. crude oil stockpiles were expected to have risen last week on recovering imports, a preliminary Reuters survey of analysts showed on Monday.

Distillate stocks were expected to be lower, while gasoline inventories rose, the survey said.

The industry group American Petroleum Institute releases its weekly inventory report at 4:30 p.m. EST on Tuesday, with the government's report following on Wednesday morning.

(Additional reporting by Gene Ramos in New York, Claire Milhench in London and Florence Tan in Singapore; Editing by David Gregorio, Dale Hudson, Bob Burgdorfer and Lisa Shumaker)