US benchmark West Texas Intermediate for delivery in August sank in early morning deals to a 3.5-month low of $49.77, hit by dollar strength and expectations of more Iranian crude in an oversupplied global market.
However, the WTI contract then rebounded to stand at $50.43, up 28 cents from Monday's closing level. Brent North Sea crude for September delivery meanwhile added 14 cents to $56.74 in late afternoon London deals.
"In a nutshell: prices haven't moved dramatically today," said oil trader Robert Montefusco at brokerage Sucden Financial.
He added that there is currently "nothing newsworthy that is going to move oil prices" ahead of Wednesday's inventories report from the US government's Department of Energy (DoE). The weekly report is a key focus for the oil market because the United States is the world's biggest consumer of crude.
"Most of the movement that we're seeing now in oil prices mainly comes from the dollar strength," added Phillip Futures analyst Daniel Ang. The dollar got a boost after Federal Reserve chair Janet Yellen last week stuck to her forecast for an increase in the US central bank's key interest rate later this year, as the economy picks up pace.
A rise in interest rates will attract investors to the dollar because of the prospect of higher returns, driving up the currency's value.
Since oil is priced in dollars, a stronger US currency makes the commodity more expensive, denting demand and putting downward pressure on prices.
Research house Capital Economics said "our expectation is that the dollar's strength will continue over the next year and a half, given the contrast in the prospects for monetary policy in the US and its major trading partners".
The return of Iranian oil "is adding bearish pressure as the market is trying to price in the crude expected to be introduced by the end of the year", said Ang. Iran and six world powers last week agreed a deal curbing Tehran's nuclear programme that aims to prevent it building an atomic bomb.
In return the West will lift crippling economic sanctions and allow Iran to ramp up crude exports. "The prospect of ongoing oversupply on the oil market if Iran resumes its supply is continuing to weigh on prices," noted Commerzbank analysts.
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