Oil rises as Dolly threatens Gulf of Mexico

NEW YORK (Reuters) - Oil rose on Monday as Tropical Storm Dolly barreled into the Gulf of Mexico, stoking concerns of disruptions to U.S. offshore oil and gas production.

U.S. crude settled up $2.16 at $131.04 a barrel after concerns about U.S. demand knocked prices from record highs over $147 a barrel last week. London Brent crude rose $2.42 to settle at $132.61 a barrel.

The U.S. National Hurricane Center warned the storm could reach hurricane strength on Tuesday. The U.S. Energy Information Administration said on its current path, Dolly was likely to miss major oil producing areas but could threaten some coastal refineries later in the week.

Shell Oil Co began flying workers from offshore platforms as a precaution, while many other oil companies with installations in the Gulf of Mexico said they were closely watching the storm.

The U.S. Mineral Management Service said four production platforms and one drilling rig had been shut, but that no output had been affected yet.

"Although direct impact on oil infrastructure is expected to be limited, there is the possibility of precautionary rig evacuations," said Jim Ritterbusch, president of Ritterbusch & Associates.

In 2005, hurricanes Katrina and Rita ripped through the Gulf of Mexico -- home to more than a quarter of U.S. oil production and around 15 percent of natural gas output -- shutting offshore rigs and coastal refineries.

Further support came from ongoing tensions between the West and Iran over Tehran's nuclear program, which the West fears could be used to make nuclear weapons.

Major powers on Saturday gave Iran two weeks to answer calls to rein in its nuclear program or face tougher sanctions after talks ended in a stalemate despite unprecedented U.S. participation.

Secretary of State Condoleezza Rice warned Iran on Monday that it faced more sanctions if it defied the two-week deadline.

Concerns that the standoff could lead to a disruption of oil supplies from the OPEC nation have supported crude in its climb to new highs this month.

"With the weekend discussions regarding Iran's nuclear program apparently resulting in another stalemate amid a two-week timeline capable of forcing fresh U.N. sanctions, a renewed injection of risk premium could characterize much of this week's trade," said Ritterbusch.

Surging demand from emerging economies in Asia have fueled a sixfold rise in oil prices since 2002, but concerns over flagging demand in the United States and other large consumers have helped temper gains.

A Reuters poll of analysts ahead of weekly U.S. government inventory data forecast U.S. crude stocks fell by 500,000 barrels last week. U.S. gasoline inventories were forecast to have fallen by 100,000 barrels, with distillate stocks seen up 2.2 million barrels.

(Additional reporting by Gene Ramos in New York, Jane Merriman and Peter Graff in London and Fayen Wong in Perth; Editing by Christian Wiessner)