By Alex Lawler
LONDON (Reuters) - Brent oil bounced back from a three-month low to around $57 a barrel on Wednesday after an industry report showed a larger-than-forecast drop in U.S. crude stocks and Iran nuclear talks failed to produce a deal.
Oil had come under downward pressure as a plunge in China's stock market accelerated and the Greek debt crisis raised concern about fuel demand.
Talks in Vienna between Iran and six world powers dragged on beyond a self-imposed deadline as officials on both sides talked of important differences preventing a deal to lift sanctions and so allow more Iranian oil onto world markets.
"Those market participants who have been betting on a rapid Iranian return to the oil market are now likely to square their positions, which should lend short-term support to prices," said Carsten Fritsch, senior oil analyst at Commerzbank (XETRA:CBKG).
Brent crude
U.S. crude
Negotiators in Vienna have given themselves at least until Friday to come up with a final deal on the Iranian nuclear program.
A senior Iranian diplomat said on Wednesday Tehran would not show flexibility regarding its "red lines", suggesting financial markets may have been over-optimistic on the prospects of a deal.
Prices gained support from expectations that the latest weekly U.S. inventory data would show a drop in U.S. crude inventories. The American Petroleum Institute's supply report on Tuesday showed a 958,000-barrel decline, ahead of Wednesday's official data.
But Chinese stocks plunged on Wednesday after the country's securities regulator warned investors were in the grip of "panic sentiment" and the market showed signs of freezing up as firms had their shares suspended.
China is the world's second-largest oil consumer.
In the Greek debt crisis, euro zone members have given Athens until the end of the week to come up with a proposal for sweeping reforms in return for loans that will keep the country from crashing out of the single currency.
"Turmoil in China and Greece may put recent robust demand growth at risk," Morgan Stanley (NYSE:MS) analysts said in a report.
"Investors have justifiable concerns about the outlook for both supply and demand going forward given current events."