Meanwhile, US President Barack Obama and David Cameron, UK prime minister, sought to reassure Israel that the accord would not threaten its security after Benjamin Netanyahu called the accord a "historic mistake”.
Brent crude fell $2.29 to $108.76 a barrel and US-traded WTI was down $1.44 to $93.40 in response to the agreement between Iran and six world powers reached at the weekend to curb Tehran’s nuclear programme in return for the easing of sanctions.
However, some analysts warned that Iranian exports are unlikely to jump in the short term because key limitations on sales – including a ban on exports to the EU – will remain in place until a comprehensive deal is reached.
US-led sanctions have reduced Iranian exports from almost 2.5m barrels a day to just 1mb/d over recent years, squeezing crude supplies, while the prospect of an Israeli or US strike on Iran’s nuclear facilities has added a further risk premium to the market.
"A military stand-off over the nuclear programme is off the table for now, and Congress should step back from attempts to increase sanctions, both of which would have been bad for the oil market,” said Amrita Sen, head of the Energy Aspects consultancy in London.
The prospect of lower oil prices buoyed shares in companies like airlines, with IAG, which owns British Airways and Spain’s Iberia, rising 3.1 per cent and easyJet up 2.5 per cent. Oil companies’ share prices came under pressure, with BP down 0.5 per cent and BG Group off 0.6 per cent.
Within the oil market the focus is growing on a sentence in a copy of the interim agreement posted on an Iranian news website, which says western powers will suspend sanctions on insurance and transportation services.
Fereidun Fesharaki, head of the FACTS Global Energy consultancy, said a relaxation of shipping and insurance sanctions could lead to an increase of between 200,000 and 400,000 b/d in Iranian export immediately.
China, India, South Korea and Japan, which enjoy waivers from US-led sanctions and are responsible for the vast majority of Iran’s remaining foreign sales, have put off importing their permitted volumes this year because of difficulties insuring cargoes.
The potential relaxation prompted relief in India on Monday, where officials had feared a further decline in Iranian supplies. India buys about a fifth of Iran’s oil exports and sanctions had reduced New Delhi’s imports from Tehran by about a third.
Anand Sharma, Indian commerce and industry minister, said his country had a "very special relationship” with Tehran and would now be "seriously taking all those measures which can improve our trade with Iran”.
Indian officials said it was not clear whether they would be allowed to release payments for supplies of crude oil already delivered, which have been held up by financial sanctions against Iran.
Diplomatic efforts to reassure Israel that western powers were not relaxing their stance towards Iran were led by the UK prime minister on Monday.
Mr Cameron said sanctions against Iran would continue to be "robustly” enforced. and that the accord was "an important first step, which must now be fully implemented”.
Israel Radio, in its Monday morning newscast, quoted Mr Netanyahu saying that as more details of the deal reached in Geneva emerged, "the clearer it was how bad the agreement is and how dangerous for Israel, the region, and the entire world”. The newscast paraphrased Mr Netanyahu’s remarks made at an awards ceremony in Jerusalem on Sunday evening, when he said that Iran would receive billions of dollars and sanctions relief without paying a real price.
But Yitzak Herzog, the newly elected leader of Israel’s centre-left opposition Labour party, accused Mr Netanyahu of "spoiling the pot” in voicing strong opposition to the interim deal. "He’s creating unnecessary panic,” he told Israel’s channel 10. "This is an interim agreement; it isn’t Judgement Day, which hasn’t arrived yet.”
Mr Obama called Mr Netanyahu following the agreement and said the two leaders "agreed to stay in close contact on this issue” as the negotiations towards a long-term agreement continue over the next six months.
But Mr Netanyahu has support from many leading members of the US Congress for his hard line.
John Kerry, the US secretary of state, in London for talks with William Hague, his British counterpart, said: "Now the really hard part begins.”
"That is the effort to get the comprehensive agreement which will require enormous steps in terms of verification, transparency and accountability,’’ he said.
* Source : FT
Additional reporting by Avantika Chilkoti in Mumbai and Victor Mallet in New Delhi