Oil slips as Dean spares U.S.

NEW YORK (Reuters) - Oil fell on Monday on forecasts U.S. Gulf of Mexico refineries and offshore production platforms would not be hit by Hurricane Dean.

Crude erased some earlier losses on news that Mexico, a top U.S. oil supplier, shut in over 80 percent of output as the storm churned toward its Bay of Campeche production center.

U.S. crude CLc1> settled down 86 cents at $71.12 a barrel after trading down to $70.05 earlier. London Brent crude LCOc1> fell 59 cents to $69.85 a barrel.

"I think we are down on the fact that Dean is going to bypass the (U.S.) Gulf of Mexico in terms of production," said Eric Wittenauer, analyst at A.G. Edwards.

The U.S. National Hurricane Center forecast Dean would spin south of the U.S. portion of the Gulf, home to about half of U.S. refining capacity and a third of domestic oil production. The storm was expected to cross the Yucatan Peninsula into Mexico's Bay of Campeche.

Analysts said forecasts that U.S. Gulf Coast refiners, slammed by Hurricanes Katrina and Rita in 2005, would escape undamaged helped bring U.S. gasoline futures 5 percent. Natural gas futures fell 14 percent on predictions production would not be hurt.

Oil rebounded off session lows after Mexico's state oil company Pemex said it was shutting in 2.65 million barrels per day (bpd) of oil production and 2.634 billion cubic feet per day of natural gas output. Mexico shipped 1.6 million bpd to the United States, about 13 percent of the top consumers imports, during the first five months of 2007.

The U.S. government said it was ready to make emergency oil loans from the nation's Strategic Petroleum Reserve to refineries, if necessary, to help offset any loss of Mexican oil supplies due to Hurricane Dean.

High domestic oil inventories will provide a cushion for U.S. refiners to replace oil exports from Mexico, the U.S. Energy Information Administration said.

Packing winds of 150 miles per hour (240 kph), Dean was likely to become a Category 5 hurricane before making landfall on the Yucatan early Tuesday morning, the NHC said.

U.S. operators had shut around 42,000 bpd out of 1.3 million bpd of Gulf oil output and 100 million cubic feet per day out of 7.7 billion cubic feet per day of natural gas on storm threats, the U.S. government said.

CREDIT WORRIES

Oil had rallied on Friday, recovering from its lowest close in a month and a half after the U.S. Federal Reserve cut its discount lending rate by a half percentage point, lifting stock markets that had been battered by the credit market squeeze.

Calm returned slowly to financial markets on Monday, but there were lingering signs that credit problems persist despite policy-makers' insistence that global economic growth would remain solid. The Dow and Nasdaq turned higher late Monday.

Last week's losses in financial markets had taken a toll on oil as investors sold to cover positions, knocking U.S. crude prices nearly 10 percent down from the record high on August 1.

A Reuters poll of analysts forecast U.S. weekly government oil inventory data to be released on Wednesday would show crude stocks off 2.9 million barrels, gasoline stocks down 900,000 barrels, and distillate stocks up 800,000 barrels. EIA/S]

(Additional reporting Janet McBride and Fayen Wong in Sydney)