Oil fell as much as 1.7 percent to below $77 on Tuesday as forecasts indicated tropical storm Alex would skirt the main production region in the U.S. Gulf of Mexico, limiting disruption there to a few precautionary shutdowns.
The price drop accelerated with slumping Asian stock markets and a strengthening dollar. Shanghai's main index plunged 4 percent, while Japan's Nikkei was poised for its worst quarter since October-December 2008 as European debt worries curbed investors' risk appetite.
U.S. crude for August tumbled as much as $1.35 to $76.90 a barrel and was down $1.22 at $77.03 by 0622 GMT, extending Monday's 0.77 percent decline.
Prices have still climbed 19 percent from a May 20 trough below $65 and are about $10 lower than an early-May 19-month peak above $87. ICE Brent declined $1.01 on Tuesday to $76.58.
The U.S. National Hurricane Center forecast Alex, located about 520 miles southeast of Brownsville, Texas, would make landfall as a hurricane near the Texas-Mexico border early Thursday.
The path of the storm looks too soft to cause any major supply disruption, said Serene Lim, a Singapore-based oil analyst at ANZ. All of this has been priced in and there is a possibility that on confirmation of this there could be further downside for oil.
Prices fell on Monday as the negative effect of a stronger dollar, which makes oil more expensive for Asian and European buyers, outweighed optimism about a better-than-expected report on U.S. consumer spending. The euro was under pressure on Tuesday because of funding concerns about the euro zone.
Banks must repay 442 billion euros ($545.5 billion) to the European Central Bank on Thursday, leaving a potential liquidity shortfall in the financial system of over 100 billion euros.
Markets are concerned that European banks are pressed to pay 442 billion euros. If those worries sustain and the euro falls, a stronger dollar would pressure oil prices down, ANZ's Lim said.
The dollar strengthened by 0.26 percent against a basket of currencies on Tuesday.
ALEX A HURRICANE?
Alex, which was moving slowly north-northwest, was expected to strengthen into the first hurricane of the Atlantic season on Tuesday, the NHC said in latest advisory on Monday.
A tropical storm, where the maximum sustained surface wind speed ranges from 39 to 73 miles per hour or 63 to 118 kilometers per hour (kph), is weaker than a hurricane, where sustained winds are 119 kph or faster.
Shell Oil Co said on Monday it was shutting production from its western and central Gulf of Mexico assets ahead of Alex.
For a factbox on preparations for Alex:
Two of Mexico's three main oil exporting terminals remained closed on Monday afternoon as Alex churned north in the Gulf of Mexico, the government said. The Dos Bocas and Cayo Arcas ports, which ship more than 1.1 million barrels per day (bpd) of Mexican crude, were shut on Sunday as the storm approached.
Mexican state-run oil giant Pemex said on Monday its offshore facilities in the Campeche sound continued to operate normally despite Alex strengthening in the Gulf of Mexico.
And U.S. oil inventories remain higher than normal, potentially buffering the impact of weather-related disruptions on U.S. output.
Inventories of distillate fuel, a category that includes heating oil and diesel, probably rose 900,000 barrels last week, according to a Reuters survey on Monday.
Crude stockpiles fell by 1.1 million barrels due to a decline in imports, the preliminary poll showed, while gasoline supplies may have slipped by 400,000 barrels.
Industry group American Petroleum Institute (API) releases inventory data for the week to June 25 on Tuesday at 2030 GMT, followed by government statistics from the Energy Information Administration (EIA) on Wednesday at 1430 GMT.
BP Plc said on Monday its plan to nearly double the amount of oil it can capture from the Gulf of Mexico leak will be delayed for about a week by high waves expected from Alex.
The U.S. National Oceanic and Atmospheric Administration forecast 14 to 23 named storms for this year's season, with eight to 14 developing into hurricanes. Three to seven of those could be major Category 3 hurricanes or above.
(Editing by Clarence Fernandez)