Oil fell below $109 a barrel on Tuesday as signs of a deal over Iran's nuclear program eased fears of oil supply disruptions and as a report predicted more misery for the Euro Zone.
The United Nations nuclear agency chief said on Tuesday he expected to sign a cooperation deal with Iran.
"(A) decision was made to conclude and sign the agreement...I can say it will be signed quite soon," Yukiya Amano, director general of the International Atomic Energy Agency (IAEA), told reporters after returning from Tehran, where he held talks with senior Iranian officials.
Brent oil prices reversed early gains to trade 5 cents down at $108.76 a barrel by 1245 GMT and U.S. crude slipped 40 cents to $92.17 a barrel.
Major powers will meet Iran on Wednesday in Baghdad to discuss its nuclear programme, but tensions with the West remain high as the U.S. Senate approved a package of new economic sanctions on Iran's oil sector on Monday.
"The mere possibility of the negotiations failing is keeping markets on their toes," said David Wech from JBC Energy.
Consultant Olivier Jakob at Petromatrix in Zug, Switzerland said the Baghdad meeting could set the tone for some time.
"The IAEA and Iran seem to have made some progress in Tehran yesterday for a new momentum on inspections," he said.
"Tomorrow's meeting should be a key input for the trading range of the next few weeks."
Worries about the loss of supply from Iran, OPEC's second largest producer, have kept Brent futures prices between $110 and $125 per barrel for most of 2012.
The European Union is due to impose a full embargo on Iranian oil imports from July and Washington is also pushing major Asian customers to cut Iranian oil purchases.
But those worries have been overshadowed by a debt crisis in the euro zone and aggravated by a poor set of U.S. and Chinese data, which have pushed oil below $110 during the past week.
As markets await Wednesday's meeting of European Union leaders, a report by the Paris-based Organisation for Economic Co-operation and Development (OECD) said that a failure by Europe to contain the crisis could derail fragile global growth led by Japan and the United States.
"Clearly Europe may eventually come out with huge intervention this summer but it is unlikely to be this pre-emptive and unlikely before the EU leaders know which way the political wind is blowing in Greece," said analysts from Deutsche Bank, referring to new elections in Greece on June 17.
French President Francois Hollande will push a proposal to share the burden of European debt at a EU summit this week.
Rising crude stockpiles in the United States may also weigh on oil prices. Crude inventories were expected to rise 1.0 million barrels last week, up for the ninth straight week, a Reuters poll of analysts showed. Distillates and gasoline stocks were forecast unchanged from the previous week's level. (Additional reporting and writing by Christopher Johnson; Editing by William Hardy)