CORRECTED-UPDATE 2-Brent falls below $107 as supply outlook brightens
(Corrects Wednesday's Brent settlement in paragraph 4 to 74 cents higher, not lower)
* Iran negotiations weigh on Brent
* Brent contract to flip into March
* U.S. crude stocks rise more than expected
By Jacob Gronholt-Pedersen
SINGAPORE, Jan 16 (Reuters) - Brent crude fell below $107 a barrel on Thursday, as expectations of more supply from the Middle East and North Africa outweighed a large drop in U.S. crude stockpiles.
Major world powers and Iran continued to move ahead on an interim deal that eases some sanctions on Tehran in exchange for curbs on its nuclear programme.
"The Iran situation is a bearish factor for Brent. But still a lot can go wrong and Iran could continue to support the market in the long term," said Tony Nunan, oil risk manager at Mitsubishi Corp in Tokyo.
Brent crude for February delivery was down 33 cents at $106.80 per barrel by 0730 GMT, after settling 74 cents higher. The contract expires Thursday.
U.S. crude fell 15 cents to $94.02, after ending up for a third straight day on Wednesday, $1.58 higher. The February contract expires next Tuesday following a long U.S. holiday weekend.
Oil was supported by data showing U.S. crude oil inventories shed 7.7 million barrels last week, compared with estimates of 600,000 barrels, the largest seven-week fall since records began.
The drop extended this week's gains in U.S. oil. Both benchmarks had trended downwards since the end of December in part due to expectations the Federal Reserve could curb its commodity-friendly monetary stimulus programme.
"I don't think the rebound (in oil prices) is sustainable," said Nunan. "Both contracts will flip into March delivery in the coming days, which is when the refinery turnaround season starts. So refining demand should drop and inventory draws reverse."
Brent's premium to U.S. crude continued to narrow, due to the expected start next week of the southern leg of the Keystone pipeline in the United States. The pipeline should help ease a supply glut at Cushing, Oklahoma, where the West Texas Intermediate crude contract is priced.
The spread CL-LCO1=R narrowed to $12.78, the smallest gap in nearly two weeks.
LOT OF CRUDE AROUND
Diplomats from Iran and a group of world powers are likely to begin talks in February on a final settlement to a long dispute over the Islamic republic's nuclear programme. Oil prices have been supported by Western sanctions against Iran.
Under a preliminary accord that goes into effect on Jan. 20, Iran's oil exports are to hold at current levels of about 1 million barrels per day.
The resumption of oil production at the southern El Sharara oilfield in Libya last week also weighed on Brent, although the main issue is still when the blockade at Libya's eastern oil ports will end.
On Wednesday, Libyan authorities were in negotiations with protesters threatening to restart a blockade of El Sharara, where protests cut output for two months last year.
Losses in oil prices were capped by further evidence of strength in the U.S. economy. U.S. producer prices rose the most in six months in December, while a gauge of manufacturing in New York state jumped to its highest level in 20 months in January.
The World Bank also painted a rosier picture of the world economy, raising its forecast for global growth for the first time in three years.
Economic growth gives investors more reason to take on risky assets like commodities, with the positive data also likely to spur the Fed to forge ahead with curbing stimulus further.
"People feel more confident about the economy at the moment, and that's supportive for oil. But the reality is there's a lot of crude around," said Nunan, referring to U.S. oil output, which last week rose to a 25-year high of 8.16 million barrels per day.
Technical analysis shows that Brent "will stay range bound in the near term due to lack of fundamentals," analysts at Phillip Futures said in a note. (Reporting by Jacob Gronholt-Pedersen; Editing by Joseph Radford and Subhranshu Sahu)