US oil prices fell more than $1 on Monday after rising sharply overnight as Tropical Storm Isaac threatened the U.S. Gulf Coast and a deadly explosion shut down operations at Venezuela's largest refinery.
U.S. oil prices have retreated by more than $2 from session highs and were trading around $95 a barrel at midday Monday.
Meanwhile the one to two percent rally in gasoline and heating oil futures continues, though prices are off earlier highs. (Read More:Isaac Heads for Gulf Coast, Hurricane Warning Issued.)
Overnight traders reacted to Saturday's fire at the 645,000 barrel per day Amuay refinery as well as the Tropical Storm Isaac by bidding up oil, gasoline and heating oil futures, but in the case of crude oil, the rally was short-lived.
Whether the Venezuela refinery disruption or storm will have more impact is hard to say. (Read More: Blast at Venezuela's Largest Oil Refinery Kills 26.)
"We'll know more (about the potential oil price impact) by Wednesday," said trader Ray Carbone of Paramount Options.
Most projections now call for Tropical Storm Isaac to strengthen to a Category 2 or 3 hurricane with winds of 96 to 130 miles per hour before reaching landfall on late Tuesday or early Wednesday.
But many traders are already anticipating that the U.S. will not stand idly by if there are any disruptions. Speculation about a potential release of oil supplies from the U.S. strategic petroleum reserve is a driving factor in the turnaround in oil prices, traders and analysts say. (Read More: Dennis Gartman: Tapping SPR Could Drive Oil to New Highs.)
Given the U.S. refinery shutdowns and potential supply disruptions due to Tropical Storm Isaac, the deadly explosion and fire at Venezuela’s 645,000 barrel per day Amuay refinery, as well as the lost supplies from the sanctions on Iranian exports, "risk of a strategic stock release is likely rising, especially in the United States," JP Morgan's head of commodities strategy Colin Fenton wrote in a research note.
"The U.S. administration has been considering an SPR release even without a storm. It will now be much easier to justify," agreed Petromatrix energy analyst Olivier Jakob.
"Disruptions from hurricanes are a legitimate reason to trigger a SPR release. There will be more production fields shut-down by precaution, the LOOP (Louisiana Offshore Oil Port) is closing down as well for crude oil imports and there is also a risk to refinery assets. Isaac is an oil event, but on the other hand we know that the administration is currently trigger-happy on the SPR," Jakob wrote in a note to clients.
However, there is no U.S. strategic reserve for gasoline or diesel and the US is now a major exporter of refined fuels. So while a possible SPR release may pressure oil prices, it will not have as great an impact on gasoline and heating oil futures, analysts say. (Read More: Oil to Hit $100, but Experts Say Sell the Rally.)
In fact, "product cracks" — reflecting refining margins or the difference in price between refined fuel and crude oil — are skyrocketing this session. (The term, "product crack", comes from the fact that refined fuels or products are made through the catalytic cracking units at refineries.) The "gasoline crack" in particular has been on fire, though it too has come off session highs.
—By CNBC's Sharon Epperson
Follow Sharon on Twitter: @sharon_epperson