Oil fell around $1 a barrel on Tuesday, as Iran's new president signalled willingness to negotiate with the West over Tehran's disputed nuclear program, and as U.S. gasoline prices slid after a sell-off in ethanol credits.

Iran's newly elected President Hassan Rouhani said he was ready to enter "serious and substantive" negotiations, reducing the geopolitical risk premium for oil prices.

A spokeswoman for the U.S. State Department said Rouhani's inauguration presented "an opportunity," but that the United States wants to see Iran take "credible steps" toward the solution of the conflict.

The price of U.S. gasoline fell 1.25 percent, dragged by a sell-off in the ethanol credits U.S. refiners must purchase to comply with environmental regulations.

The cost of the credits, also known as Renewable Identification Numbers (RINs), slid almost 20 percent as the Environmental Protection Agency announced it would use its authority to lower its volume goal for biofuel use in 2014.

RINs fell as low as 80 cents, after having reached prices of more than $1 on Monday and of $1.50 two weeks ago.

"The RINs issue sent oil products lower, and they were already weak because of returning refinery units," said Phil Flynn, an analyst with Price Futures Group in Chicago.

"Even ethanol producers are open to the EPA issuing some sort of waiver to avoid having congress revamp the whole program."

U.S. oil fell $1.26 to settle at $105.30 per barrel. It hit a session low of $104.86 a barrel.

Brent crude dropped 52 cents to settle at $108.18 per barrel, having fallen to a low of $107.46.

The North Sea benchmark's premium to its U.S. counterpart settled at $2.88 per barrel, swinging as wide as $2.94 and as narrow as $1.82 during the session.

Gasoline futures tumbled 3.6 cents to trade around $2.91 a gallon, having reached lows of $2.88.

Prices were further pressured by news that oil exports from the Buzzard field in the North Sea, which form part of the underlying market for Brent futures, are set to resume on Tuesday, easing concerns about short-term supply disruptions.

The U.S. Energy Information Administration also said that the United States will be producing more crude oil than it imports by October, as output jumps to the highest level since 1991.


Signs that the U.S. Federal Reserve will probably reduce its bond-buying stimulus package later this year also had a negative impact on oil prices.

Chicago Fed President Charles Evans, who had been among the strongest proponents of fiscal stimulus policies, said the U.S. central bank is "quite likely to reduce the flow of purchases rate starting later this year."

"Their comments seem to suggest that they are going to cut spending in September, and that hurts risk assets like oil," said Bob Yawger, director of energy futures for Mizuho Securities USA Inc in New York.

The prices of oil and other commodities have been supported by the Fed's bond-buying program, designed to boost the economy.


Oil's decline was checked by news that Washington told U.S. citizens in Yemen to leave that country immediately due to the threat of potential attacks from militants. That pushed Washington to shut diplomatic missions across the Middle East, and to airlift some personnel from Yemen on Tuesday.

"The latest terror warning issued by the U.S. for North Africa and the Middle East are likely to preclude any sharper fall in prices," Commerzbank oil analyst Carsten Fritsch said.

Losses were also limited by expectations that U.S. crude and gasoline stockpiles fell last week.

A Reuters poll of oil industry analysts, ahead of weekly inventory reports from the American Petroleum Institute (API) and the U.S. Energy Information Administration, forecast on Tuesday a drop in crude stocks of 1.2 million barrels in the week ended Aug. 2.

The drop, which was steeper than originally predicted, would mean that U.S. crude oil inventories are 3.7 million barrels smaller than what they were this time last year.

In the previous week, U.S. crude inventories rose 431,000 barrels to about 365 million barrels. The API report is released at 4:35 p.m. EDT on Tuesday (2035 GMT).