Oil dips below \, market eyes Hurricane Dean

SEOUL, Aug 21 (Reuters) Oil extended losses to below a barrel on Tuesday on relief that powerful Hurricane Dean would not hit U.S.

Gulf Coast oil platforms and refineries, although Mexico's move to shut 80 percent of its output limited the fall.

U.S. crude fell 44 cents to .68 a barrel by 0338 GMT, nearing its lowest in a month and a half after dropping 86 cents a day ago when forecasts showed that Dean was taking a more southerly path toward Mexico, sparing the Gulf, home to half of U.S. refining capacity and a third of its oil production.

London Brent crude fell 36 cents to .49.

U.S. crude has tested the psychological support level several times over the past week, and some dealers say a break below that level could signal another bout of heavy selling.

''Some traders expect prices to fall to around a barrel without significant damage from the hurricane,'' said Koo Ja-kwon, crude analyst at Korea National Oil Corp (KNOC).

U.S. operators were in the process of restoring some 42,000 barrels per day (bpd) out of 1.3 million bpd of Gulf oil output and 100 million cubic feet per day out of 7.7. billion cubic feet per day of natural gas that had been shut on storm threats.

But Dean's risk had yet to ebb completely as it strengthened into a maximum-strength Category 5 hurricane with winds of around 160 miles per hour (256 kph) on its way to the Yucatan Peninsula, the U.S. National Hurricane Center said.

It is expected to weaken before crossing into the Bay of Campeche, where Mexico's state oil company Pemex has evacuated all its oil and gas wells, shutting in 2.65 million bpd of oil output, slightly more than Venezuela's entire production.

The U.S. government 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.

But analysts said the threat of lasting damage in Mexico was likely more limited than in the U.S. portion of the Gulf.

''I think they're not as vulnerable as the facilities in U.S.

Gulf, where production is way offshore and in deeper water. And in Mexico, there's no refining capacity at risk,'' said Tony Nunan, a risk manager at Mitsubishi in Tokyo.

Oil traders are keeping a watchful eye on financial markets for signs of more turmoil that could spur liquidation.

U.S. blue-chip stocks rose on Monday and Asian stocks extended gains on Tuesday as concerns over the stability of credit markets appeared to ease.

''I think there's still a big concern that this is just a lull before another big drop,'' said Nunan. ''But I think the fundamentals are still supportive and are getting better -- as long as the economy doesn't fall apart.'' 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.

REUTERS KR RAI1118