Oil falls toward $78 as Atlantic storm fades

SINGAPORE (Reuters) - Oil prices on Monday continued a retreat from record highs after tropical storm Ingrid faded in the Atlantic over the weekend, soothing fears it could hit Gulf of Mexico crude production and refining.

U.S. crude for October fell 51 cents to $78.59 a barrel by 0311 GMT, after falling 99 cents on Friday, when it hit a fresh record of $80.36. London Brent crude for November traded 27 cents lower at $75.95 a barrel.

Ingrid, the ninth named storm of the 2007 hurricane season, was downgraded on Saturday to a tropical depression, while three refineries in Texas shut by the previous Gulf of Mexico storm were working to restore operations.

Also allaying supply concerns, Mexico's state-owned monopoly Pemex said it would resume natural gas and oil supply to its clients from Monday after attacks on several of its pipelines last week cut off flows and temporarily lifted oil prices.

Hurricane and other supply risks, together with falling U.S. inventories and fund flows into energy from poorly performing equity markets, have fueled the recent hike in oil prices. But fears of a global credit crunch have kept a lid on the rally.

"The situation in the credit markets and the fallout from that is taking a lot of focus away from more direct factors such as geopolitical concerns or storms," said Andrew Harrington, a commodities analyst at Australia and New Zealand Bank.

Investors are looking ahead to a monetary policy decision in the United States, expecting the central bank to lower rates and help ease a credit crunch that many fear could spark a recession and hit oil prices.

British mortgage lender Northern Rock is the latest casualty in the unfolding credit squeeze and last week had to turn to the country's central bank for emergency funds.

Former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday the turmoil in housing and credit markets did not look like it would produce a broader economic downturn.

But OPEC said on Friday turmoil in world financial markets could dent fuel consumption and considerable uncertainty over supply and demand made it difficult to determine oil output policy.

The producers group agreed a small supply increase last week, but analysts said the decision to raise output by 500,000 barrels per day (bpd) from November 1 was not enough to reverse a rally that has lifted prices by 29 percent this year.

Though oil prices have quadrupled since 2002, when adjusted for inflation the price is below the $90-a-barrel peaks of the Iranian Revolution in 1979.

Oil hits new record above $80

Oil and wheat prices soared to new records this week while gold established a foothold above the key $700 level awaiting next week’s vital decision on US interest rates, which is expected to provide directional impetus for both precious and base metals.

Oil hit new highs in three successive sessions, reaching a record $80.36 on Friday before profit taking dragged prices lower

Nymex October West Texas Intermediate slipped 27 cents to $79.82 a barrel on Friday, gaining 4.1 per cent over the week.

ICE October Brent eased 23 cents to $76.89 a barrel, up 3 per cent this week.

“Too little, too late,” was the verdict of many traders on this week’s decision by the Organisation of the Petroleum Exporting Countries to raise crude output by 500,000 barrels a day from November.

As global oil production is estimated to have shrunk by 650,000 b/d in the third quarter, the cartel’s move was brushed aside as inadequate to prevent further tightening in energy markets over the winter.

“We are currently witnessing the tightest oil market since the Iraq war,” said Francisco Blanch, commodity strategist at Merrill Lynch. “A substantially colder-than-normal start to the winter could push oil above $90 a barrel,” he said.