Oil edged down toward $99 as uncertainty over a Greek debt deal offset concerns that Iran could block shipments of crude in the wake of the European Union's decision to embargo imports of Iranian oil.
Negotiations to have Greece's private creditors swap their bonds for new ones of a lower value are crucial to avoiding a default and contain the European debt crisis. But eurozone governments have taken a hard line on the rates the new bonds should pay, insisting they should be below 3.5 percent, less than the creditors are so far willing to accept.
That has raised the prospect that the deal might fail, increasing uncertainty over Greece's future and hurting stock and commodity markets on Tuesday.
Benchmark oil for March delivery was down 38 cents at $99.20 a barrel by late morning in Europe in electronic trading on the New York Mercantile Exchange. The contract rose $1.25 to settle at $99.58 a barrel in New York on Monday.
Brent crude was down 48 cents at $110.10 on the ICE futures exchange in London.
The concerns over Greece offset worries about supplies out of the Persian Gulf. Iran has said it could close the strategic Strait of Hormuz, through which a fifth of the world's crude is transported, in response to sanctions by the West.
On Monday, the EU said its refineries would stop buying Iranian crude after July. It also froze assets of Iran's central bank. The sanctions are meant to force Iran to talk with the West about its nuclear program. Iran says its nuclear program is peaceful, but Western nations suspect it is trying to build nuclear weapons.
The embargo itself isn't expected to affect world supplies, although markets would get reshuffled. Analysts say China, which is one of the biggest buyers of Iranian crude, probably will buy more Iranian oil at below-market prices when the embargo begins. China would reduce imports from other oil-producing countries, which would then sell more to Europe.
"Iran needs to sell its oil to someone," independent analyst and trader Stephen Schork said. "Outside the West, Iran really has only one buyer: China. That means China's probably going to get some sweetheart deals."
Experts say Iran doesn't have the firepower to close off the strait, which is the only way to get from the Persian Gulf to the open sea. But a conflict there could clog the waterway with military vessels and force the world's refineries to wait for crucial oil shipments.
Later in the day, investors will be monitoring fresh information on U.S. stockpiles of crude and refined products.
Data for the week ending Jan. 20 is expected to show builds of 700,000 barrels in crude oil stocks and 2.2 million barrels in gasoline stocks, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.
The American Petroleum Institute will release its report on oil stocks later Tuesday, while the report from the Energy Department's Energy Information Administration — the market benchmark — will be out on Wednesday.
In other energy trading, heating oil rose 0.3 cents to $3.01 a gallon and gasoline futures fell 0.9 cents to $2.77 a gallon. Natural gas futures were up 8.8 cents at $2.61 per 1,000 cubic feet.