Oil slipped towards $72 on Wednesday after Iran said a proposal by world powers to end a dispute over its nuclear programme had positive points, easing fears over potential supply disruption from the Middle East.
Traders also expect a rise in U.S. gasoline stockpiles in data due on Wednesday to provide a more comfortable supply cushion against any fuel shortages during peak summer demand in the world's top consumer.
U.S. crude oil traded 34 cents down at $72.16 a barrel by 0600 GMT, after slipping 10 cents on Tuesday. London Brent crude lost 23 cents to trade at $70.58.
Iran assessed a package of incentives on Tuesday put together by world powers. Its chief negotiator said the proposals had some positive steps in them but also contained some ambiguities that should be removed.
"The more conciliatory comments from Iran raised hopes that oil (and gas) supply in the Gulf region would not be disrupted," said David Thurtell of the Commonwealth bank of Australia.
Prices had rallied towards $74 on Monday after Iran's Supreme Leader Ayatollah Ali Khamenei said on Sunday oil flows from the Gulf would be endangered if Washington made a "wrong move." The dispute helped drive oil to a record $75.35 in April.
Iran said on Tuesday it would study the proposal in detail and afterwards have a round of talks and negotiations. Details of the proposal have not been made public but Iranian officials said incentives included access to aircraft parts for its civilian fleet and the chance to purchase U.S. agricultural technology.
Western diplomats have also suggested it might include offers of nuclear reactor technology, with an arms embargo among the possible penalties if Iran refuses to give up uranium enrichment.
U.S. President George W. Bush said he was encouraged by Iran's initial response though remained cautious, while U.S. Energy Secretary Sam Bodman said the world economy could handle any cutoff in Iranian oil exports "for a while".
Analysts said oil prices would be hostage to Iran headlines for the foreseeable future. Forward U.S. crude for delivery later this year also slipped on Wednesday but contracts for the fourth quarter 2006 remained over $74 a barrel.
The high prices have sparked worries over softer demand and higher inflation in the United States, after Federal Reserve chief Ben Bernanke said on Monday that the U.S. central bank needed to remain vigilant on inflation risks even as the economy shifted to a slower pace of growth.
But the U.S. Energy Information Administration on Tuesday said consumers were adjusting to higher prices and raised its demand growth projections. It also said in a report that hurricanes should force companies to shut in more U.S. Gulf Coast oil and gas production than normal this year.
The next signal on demand and supply will come from U.S. government data due later on Wednesday, with a Reuters poll of analysts [EIA/S] expecting a 1.4 million barrel rise in gasoline stocks, the sixth weekly build in a row.
Crude supplies were seen falling 500,000 barrels on average last week as refineries try to meet higher summer fuel demand