Oil tumbled nearly $2 a barrel below $70 on Tuesday as Hurricane Dean lost strength, easing concerns of supply disruptions from Mexico and the U.S. Gulf where oil installations were threatened by the powerful storm.
U.S. crude was $1.70 down at $69.42 a barrel by 12:10 p.m. EDT, the first time it has fallen below $70 since July 2.
It had dropped 86 cents in the previous session after forecasts showed that Dean was moving towards Mexico and would skirt the U.S. Gulf that is home to half of the country's refining capacity and a third of its oil production.
London Brent crude fell $1.21 to $68.65.
Some lengths may have been kept just in case there was some damage to installations in Mexico. As soon as the market realized that there would not be any damage, correction has continued, said Olivier Jakob at Petromatrix.
U.S. crude has tested the $70 psychological support level several times in the past week, and some dealers had predicted a breach of that level could trigger another bout of heavy selling.
Hurricane Dean weakened to a Category 2 storm from a monster Category 5 as it crossed Mexico's Yucatan Peninsula on Tuesday, with peak sustained winds now at 105 miles per hour (170 kph), the U.S. National Hurricane Center said in an update.
Dean, the Atlantic season's first major storm, had caused mass evacuations of personnel at many of Mexico's oil and gas wells, and forced the country to suspend oil exports from three of its major oil ports.
Mexico's state oil company Pemex shut in 2.65 million bpd of oil output -- slightly more than Venezuela's entire production.
U.S. oil and gas operators began returning workers to installations.
EMERGENCY OIL LOANS
The U.S. government also 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 U.S. imports.
The oil market continued to watch financial markets for signs of further turmoil that could spur more sell-off of oil positions by investors to raise cash amid a credit squeeze on account of the U.S. subprime mortgage crisis.
The credit squeeze has seen central banks across the world inject cash into banking systems, and last week forced the U.S. Federal Reserve to announce a surprise cut to a key rate at which it lends short-term funds to banks.
European stock markets closed lower, while U.S. stocks edged higher in choppy trading.
U.S. Treasury Secretary Henry Paulson said the global financial turmoil would take time to play out while noting that the global economy remained strong.
China's central bank raised interest rates for the fourth time this year, aiming to counter expectations of accelerating inflation.
The U.S. 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.