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Oil Closes Below $80 on U.S. Gulf Output Resurgence

Oil Refinery in California
Oil Refinery in California

Oil dropped below $80 per barrel Tuesday as more U.S. production in the Gulf of Mexico came back online after being shut by foul weather last week.

U.S. light, sweet crude settled down $1.42 to $79.53 per barrel.

London Brent crude shed $1.29 to $77.62 per barrel.

Energy companies in the Gulf of Mexico shut nearly two-thirds of output by Friday as a storm blew through the region, sending U.S. oil to a record high of $83.90 last week.

Production was back up to over 96 percent of normal volumes by Tuesday, the U.S. Minerals Management Service said, as workers returned to offshore rigs.

"The softening is due to light liquidation of precautionary positions taken out late last week as fears that there could be storm damage to U.S. Gulf oil facilities over the weekend proved unfounded," Barclays Capital said in a research note.

But traders continued to keep an eye on weather in the Gulf as the U.S. National Hurricane Center said Tropical Storm Karen had formed in the eastern Atlantic Ocean. Forecasts did not show the storm hitting operations in the Gulf.

"In the short term, we believe there's potential for a price correction," said Harry Tchilinguirian, senior oil analyst at BNP Paribas, citing expectations of refinery maintenance and a seasonal drop in demand as bearish factors.

"When the risks of hurricanes are also behind us, the sort of correction we had last October -- losing $10 quite easily at the end of the season -- we believe we could have a repeat of that," he added.

U.S. Inventories

The market is also looking for direction from the U.S. weekly petroleum stocks data to be released on Wednesday after four straight weeks of crude inventory draws.

A Reuters poll of analysts showed U.S. refiners probably slowed imports of crude oil last week, causing inventories to fall by about 2.4 million barrels.

Stocks of distillates, including heating oil, were forecast to have risen by 1.3 million barrels while gasoline inventories were seen falling 100,000 barrels.

Refiners could have curbed imports for economic reasons too, the poll showed, as prices for future crude deliveries are cheaper than the currently traded month, creating incentives to draw down inventories.

A Reuter's poll of analysts forecast oil's rally would continue next year with average prices seen hitting a record level on the back of tight oil supplies, red-hot global demand and a weakening dollar.

Analysts raised their average 2008 oil price forecast for U.S. crude to $66.56 per barrel, surpassing the record average of $66.24 reached in 2006.