Oil down as Iran races for Tuesday deadline on nuclear deal

By Barani Krishnan

NEW YORK (Reuters) - Oil settled down for a second straight session on Monday as Iran and six world powers tried to negotiate a deal on Tehran's nuclear programme that could end Western sanctions and allow the OPEC member to ship more crude into an already flooded market.

Crude prices finished sharply off the day's lows, however, as prospects that the talks would produce a deal looked even at best, with just 24 hours before the March 31 deadline.

Iran and negotiators for the world powers have made progress in their discussions, according to officials following the talks in Lausanne, Switzerland, and many investors believe there will be some sort of an agreement to free Tehran from at least part of the U.S.-led sanctions that have restricted its oil exports.

But with only a day to the deadline, U.S. State Department spokeswoman Marie Harf offered just a 50-50 chance of achieving a framework agreement with Iran.

That led to a late burst of support for oil, and prices settled only slightly lower, after falling more than 2 percent earlier in the session, extending Friday's 5 percent drop.

"When you've barely 24 hours to announce a deal, it's not very convincing to hear that you've just a 50-50 chance," said John Kilduff, partner at New York energy hedge fund Again Capital.

"I myself am convinced that this market should be trading a lot lower. But we're reacting to headlines, and after Friday's selloff, anything even remotely positive to the bulls could lead to a surfeit of short-covering."

Benchmark Brent oil settled down 12 cents at $56.29 a barrel, after falling $1.21 earlier.

U.S. crude finished down 19 cents at $48.68, having slid by $1.26 earlier.

The Iranian issue aside, oil prices were also pressured by a stronger dollar that made commodities denominated in the greenback, such as oil, costlier for holders of other currencies. [USD/]

Tehran is keen to recover market share lost under the U.S.-led sanctions that have restricted its crude exports to just 1 million barrels per day from 2.5 million bpd in 2012.

Oil markets are well supplied, with recent figures showing global production outstripping demand by around 1.5 million bpd.

"Regarding Iran, there are two possible outcomes: a framework deal or an extended deadline," Bjarne Schieldrop, chief commodities analyst at SEB Markets in Oslo, told the Reuters Global Oil Forum.

(Additional reporting by Christopher Johnson in London and Henning Gloystein in Singapore; Editing by Dale Hudson, Susan Thomas and Lisa Von Ahn)