Oil hits six-week low as storm concern fades

Tropical Storm Dolly, the first big storm threat of 2008, was still expected to become a hurricane, but was unlikely to have an impact on crude production in North America.

"Barring a veer north, the risks of an oil price disturbing event are low," Citi analysts said in a research note.

Oil prices have fallen more than 14 percent over the past 10 days from a July 11 high of more than $147.

U.S. crude futures for August fell $4.78 to $126.26 a barrel before rebounding slightly to $126.99 by 1410 GMT. London Brent was off $3.62 at $128.99.

The storm strengthened slightly on Tuesday as it moved over the warm waters of the western Gulf of Mexico towards the Texas-Mexico border, the U.S. National Hurricane Center said in its latest update.

Concerns Dolly could affect oil production had added $3 a barrel the previous session and refineries were still keeping a watch on the weather.

"We have done things like reviewing emergency supplies, backed up computer programs," said Bill Day, spokesman for Valero Energy Corp. about preparations at its 142,000 barrels per day refinery in Corpus Christi. "No operational items yet, but we are still watching it closely."

Growing worries over the health of the U.S. economy led last week to the largest oil price fall ever in dollar terms. In percentage terms, crude fell by more than 12 percent from the July 11 high of more than $147.27.

Simon Wardell of Global Insight in London said it was still not clear whether the price slide had finished after prices firmed up on Monday and held relatively steady on Tuesday.

"It did fall an awfully long way so some people may be putting more money in," he said. "It might be a pause, it might be a part of a rebound."

Oil supplies have grown more comfortable as demand for gasoline has fallen in the United States in response to high prices and worries about the economy.

The next set of government data on U.S. oil inventories, for release on Wednesday, was expected to show crude stocks had fallen by 500,000 barrels, according to a Reuters poll of analysts.

Crude stocks unexpectedly rose last week by 3.0 million barrels, helping to drive oil prices lower.

The market appeared little effected by reports of a halt of exports from Iraq's northern fields through Turkey due to a legal dispute and a delay of several days in Iraqi shipments from the southern port of Basra due to shipping congestion.