Oil extended losses to below $71 a barrel on Tuesday on relief that powerful Hurricane Dean would not hit US Gulf Coast oil platforms and refineries, and hope that it posed a lesser threat to Mexico's oil patch.
US crude fell 39 cents to $70.73 a barrel, nearing its lowest in a month and a half after dropping 86 cents a day ago when forecasts showed that Dean was taking a more southerly path toward Mexico, sparing the US Gulf, home to half of US refining capacity and a third of its oil production.
London Brent crude fell 35 cents to $69.50. US crude has tested the $70 psychological support level several times over the past week, and some dealers say a break below that level could signal another bout of heavy selling. "Some traders expect prices to fall to around $67 a barrel without significant damage from the hurricane," said Koo Ja-kwon, crude analyst at Korea National Oil Corp (KNOC).
Although US operators have already begun restoring the small amount of production they shut in preparation for Dean, 80 percent of Mexico's oil production was shut in as they braced for the storm to cross into the Bay of Kampuchea.
Dean grew into a maximum-strength Category 5 hurricane with winds of around 160 miles per hour (256 kph) on its way to the Yucatan Peninsula, the US National Hurricane Centre said.
It is expected to weaken before crossing into the Bay of Kampuchea, where Mexico's state oil company Premix has evacuated all its oil and gas wells, shutting in 2.65 million bpd of oil output slightly more than Venezuela's entire production.
The US 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 from Mexico, which supplies 13 percent of US, imports.
But analysts said the threat of lasting damage in Mexico was likely more limited than in the US portion of the Gulf. "I think they're not as vulnerable as the facilities in the US Gulf, where production is way offshore and in deeper water. And in Mexico, there's no refining capacity at risk," said Tony Nunan, a risk manager at Mitsubishi in Tokyo.
Oil traders are keeping a watchful eye on financial markets for signs of more turmoil that could spur liquidation, although Asian markets rose on Tuesday as concerns over the stability of credit markets appeared to ease.
"I think there's still a big concern that this is just a lull before another big drop," said Nunan. "But I think oil market fundamentals are still supportive and are getting better as long as the economy doesn't fall apart."
The US weekly oil inventory data to be released on Wednesday is likely to show crude stocks fell 2.9 million barrels, gasoline stocks down 900,000 barrels, and distillate stocks up 800,000 barrels, a preliminary poll showed.