UPDATE 3-Oil drops towards $108 as U.S. storm wanes
* Gulf of Mexico output returning to normal after storm
* Kazakhstan's giant Kashagan oilfield resumes production
* Concerns over U.S. debt default cloud demand outlook
(Updates throughout, changes dateline, previous SINGAPORE)
LONDON, Oct 7 (Reuters) - Brent crude fell towards $108 a barrel on Monday as oil production resumed in the Gulf of Mexico after a tropical storm, while concerns over a U.S. government shutdown clouded the outlook for demand.
Tropical Storm Karen led producers to shut in nearly two-thirds of oil output in the Gulf of Mexico last week. It was downgraded to a tropical depression on Saturday, with production starting to return by the end of the weekend.
Brent crude fell $1.15 to a low of $108.31 a barrel and was trading around $108.35 by 0750 GMT. The benchmark ended higher last week, snapping a three-week losing run.
U.S. crude dropped $1.15 to $102.69 a barrel.
"Abundant supplies mean the market has little to worry about now that the storm has passed," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt.
In the Gulf of Mexico, BP Plc, Marathon Oil Corp and Chevron Corp were returning workers to offshore facilities by helicopter after earlier evacuations, while other companies were also working to restore operations.
The Gulf of Mexico accounts for about 1.3 million barrels per day (bpd), nearly a fifth of U.S. oil output.
Fritsch said oil demand could be curbed by the row over the U.S. budget that has shut parts of the U.S. government.
Economists are increasingly concerned that the row could prevent moves to raise the country's borrowing limit by an Oct. 17 deadline, raising the possibility of a sovereign debt default.
Republican House Speaker John Boehner vowed on Sunday not to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.
A consortium developing Kazakhstan's giant Kashagan oilfield in the Caspian Sea has resumed production. The offshore field - one of the world's biggest oil finds in decades - was launched on Sept. 11 but work halted on Sept. 25, after the discovery of a gas leak.
Combined with higher supply from Libya, Iraq and North America, increases in global oil production could outpace demand growth by as much as 400,000 bpd in the fourth quarter, according to Barclays analyst Kevin Norrish. Most of those barrels are likely to go into storage, he said.
"We (expect) lacklustre product demand growth beyond any seasonal increase, and refining margins remain extremely poor, which will not be helped by the end of the autumn refinery maintenance in late October," Norrish said in a report.
(Additional reporting by Jacob Gronholt-Pedersen in Singapore; Editing by Dale Hudson)