Oil prices dropped slightly to near $78 a barrel Monday as traders kept a close eye on damage a possible hurricane could cause rigs in the Gulf of Mexico this week.
By early afternoon in Europe, benchmark crude for August delivery was down 48 cents to $78.38 a barrel in electronic trading on the New York Mercantile Exchange. The contract added $2.35 to settle at $78.86 on Friday.
Tropical depression Alex, which has pounded parts of Mexico and Central America, is expected to regain strength as it moves over warmer waters in the Gulf and possibly become a hurricane heading toward Mexico's Caribbean coast later in the day or Tuesday, said the U.S. National Hurricane Center in Miami.
The storm will likely strike well away from the area where BP is trying to stop a massive oil leak, the center said.
"The lack of follow through from the bulls or the bears is understandable, hurricane activity in the Gulf Coast remains unknown," energy consultant The Schork Group said in a report.
Hurricane activity is one of the wild cards analysts are considering as they try to predict oil prices for the rest of the year.
On Friday, oil prices surged to their highest level in seven weeks on the back of the hurricane threat.
"We suspect that some of Friday's gains will be rolled back as fears will likely fade that Alex could threaten the more important U.S. production outlets to the north," said MF Global senior commodities analyst Edward Meir. "We would not be surprised to see a retreat back into the mid-$70 range," especially if the weekly reports on U.S. inventories of crude oil and refined products show more builds.
Analysts said financial investors were closing long positions - those betting on rising oil prices - while increasing short positions expecting prices to fall further.
"Obviously, speculative investors think that there is no longer any upward potential," said a report from Commerzbank in Frankfurt.
National Australia Bank expects oil to trade at $84 a barrel at the end of this year, less than the bank's previous forecast of $87. Strong crude demand from emerging countries should help offset weak consumption in developed economies, the bank said in a report.
In other Nymex trading in July contracts, heating oil fell 2.58 cents to $2.0864 a gallon, gasoline dropped 2.16 cents to $2.1462 a gallon and natural gas was down 3.6 cents at $4.825 per 1,000 cubic feet.
In London, Brent crude fell 63 cents to $77.49 a barrel on the ICE futures exchange.
Associated Press writer Alex Kennedy in Singapore contributed to this report.
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