Oil rallies as Iran nuclear talks drag on

LONDON (Reuters) - Brent crude oil futures reversed early losses to rally to $55.50 barrel as talks over Iran's nuclear programme continued, curbing expectations of an immediate deal that would allow Iranian crude onto the market.

Talks between Iran and six world powers in the Swiss city of Lausanne to settle a dispute around Tehran's nuclear programme extended past a Tuesday deadline into Wednesday.

Brent crude for May delivery was up 40 cents at $55.51 a barrel by 1245 GMT, after earlier touching a session low of $54.70.

U.S. crude for May delivery was trading 14 cents higher at $47.74 a barrel.

"A lot of people were expecting the deal to be done overnight and Iran to be pumping a million barrels tomorrow. That's not going to be the case," said Amrita Sen, chief oil analyst at Energy Aspects.

"Everybody's been lowering expectations and I think that's feeding into prices," she said.

German Chancellor Angela Merkel said on Wednesday that while much progress had been made the talks would only end when agreement was reached on all points. French Foreign Minister Laurent Fabius said the talks were not sufficiently advanced to ensure a quick conclusion.

Iranian senior nuclear negotiator, Abbas Araqchi, said Iran hoped to wrap up talks by Wednesday night.

"We insist on lifting of financial and oil and banking sanctions immediately ... for other sanctions we need to find a framework," he told Iranian state television on Wednesday.

Talks had appeared to get bogged down after the United States warned it was ready to abandon them and Iran affirmed its "nuclear rights". Officials cautioning any agreement would probably be fragile and incomplete.

Iran produces about 2.8 million barrels per day (bpd), according to a Reuters survey, although Western sanctions limit exports to 1 million bpd. It keeps about 30 million barrels on its fleet of tankers ready to be sold, if possible.

Higher OPEC supply weighed on oil prices early on after a Reuters survey showed the oil cartel increased supply in March by 560,000 bpd to its highest since October. Iraq's exports rebounded after bad weather and Saudi Arabia pumped at close to record rates.

U.S. crude inventories rose for the 12th straight week by 5.2 million barrels, in the week to March 27, according to data from the American Petroleum Institute. Official stockpile data is due out on Wednesday at 1430 GMT. [API/S]

(Additional reporting by Jacob Gronholt-Pedersen in Singapore; Editing by William Hardy and David Clarke)