News of a unanimous agreement by European leaders on a bailout loan for Athens, which should allow Greece to stay in the euro zone, helped pare early losses.
Brent crude for August fell $1.89 to a low of $56.84 a barrel before rallying back to around $57.30 by 4.40 a.m. EDT.
U.S. light crude, also known as West Texas Intermediate (WTI), was down $1.15 at $51.59 a barrel.
Iran and six world powers are reportedly on the brink of finding a nuclear deal that would bring sanctions relief in exchange for curbs on Tehran’s nuclear program.
A senior Iranian negotiator said a nuclear deal would be completed but cautioned that there was work to be done and he could not promise the talks would finish on Monday or Tuesday.
“I cannot promise whether the remaining issues can be resolved tonight or tomorrow night,” Iran’s Tasnim news agency quoted Deputy Foreign Minister Abbas Araqchi as saying.
The chance of Iran adding to a global oil surplus at a time of weak demand led some analysts to forecast more oil falls.
Bank of America Merrill Lynch said U.S. crude prices “could soon drop well below our $50 per barrel target” in the third quarter of 2015.
Commerzbank said a fall below $55 per barrel in Brent and below $50 per barrel in U.S. crude was “conceivable”.
Oil prices pared early sharp losses after European Council President Donald Tusk said euro zone leaders had “unanimously reached agreement” on a deal for Greece.
Prime Minister Alexis Tsipras confirmed Greece had secured debt restructuring and medium-term financing in a growth package worth 35 billion euros ($38.7 billion) in a deal with its creditors.
But the oil market remained bearish.
“Implementation risks remain, and a possible nuclear deal with Iran should limit the upside,” said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt.
Although analysts say it would take until 2016 before Iran would be able to return to full-scale exports, most estimate that a jump of around 200,000 barrels per day in exports could be seen in the short term, adding to a current surplus of about 2.6 million barrels a day.
With oversupply ongoing and abundant economic risk, several banks have lowered their oil price forecasts.