Oil steadied near $73 a barrel on Tuesday after Iran called for more talks with the West over a dispute about its nuclear enrichment program in which it runs a risk of international sanctions.
The world's fourth biggest oil exporter handed over its reply to an incentives package by world powers, saying it was ready to start "serious talks."
But Iran has given no sign of heeding the key United Nations Security Council demand that it freeze uranium enrichment.
September US crude oil, which expired on Tuesday, settled 18 cents higher at $72.63 a barrel, after surging $2.39 in the past two trading days. The October contract fell 20 cents to $73.10. London Brent crude for October delivery was down 14 cents at $73.24 a barrel.
"Users of oil are factoring in a higher possibility of supply disruption the longer this nuclear stand-off continues," said fund manager Ivor Pether, who helps manage about 4 billion pounds ($7.6 billion) in UK equities at Royal London Asset Management, including Shell and BP shares.
"Iran doesn't feel it needs to concede anything to the West, I don't think. The dispute will continue to be a point of focus for the market for a long time and is adding a risk premium to prices."
Iran gave its reply at a meeting in Tehran to envoys representing the six co-sponsors of the offer.
The United Nations Security Council has demanded that Iran halt its nuclear work by a deadline of August 31 or face sanctions. Traders fear a cut to Iran's crude exports of more than 2 million barrels per day either as a result of punitive sanctions or a decision by Tehran to use its oil for leverage.
A White House spokeswoman said President George W. Bush had yet to examine the Iranian response. "The main risk for the oil market is that we're closer to a time when Iran's oil might not be on the market," said Tobin Gorey of the Commonwealth Bank of Australia.
Analysts say Iran is calculating any sanctions would start with modest steps, such as travel bans or asset freezes, while Russia, China and many European Union states may be unwilling to join sanctions that would jeopardise export contracts.
Markets grew nervous about a report that an Iranian ship had fired on a Romanian oil rig before troops boarded it. But later, the incident was linked to a commercial dispute. An Iranian oil official denied that military force was used on the rig.
Concern about Iran has driven US oil back up from a dip below $70 on Friday, which came after a cease-fire between Israel and Lebanon helped push prices down from a record $78.40 in July. Oil prices remain 19 percent up this year on the fear of disruption to Iran's exports and reduced Nigerian supplies.
Traders are also keeping an eye on the fourth tropical depression of the 2006 Atlantic hurricane season, which formed on Monday in the far-eastern Atlantic. The US National Hurricane Center said it expected the storm to become Tropical Storm Debby within 24 hours. Last year's record hurricane season temporarily closed a quarter of US crude and fuel production.
Weekly US petroleum supply data will be released on Wednesday. A Reuters survey forecast that US crude stocks fell more than 1 million barrels last week, but it was too soon to see heavy impact from a partial outage of Alaska's Prudhoe Bay oil output.
"Iran seems to be the talk of the town at the moment and a tropical depression is building up in the Atlantic," said Kevin Blemkin, an oil broker at Man Financial. "With the news that's around, any dips are probably going to be bought into."