Oil steady below $113, Isaac stokes supply worries

Oil was steady below $113 a barrel on Tuesday, as tropical storm Issac bore down on the Gulf of Mexico and forced companies to close down U.S. oil production.

"Because U.S. Gulf Coast refiners are operating near full utilization, the potential for disruption to oil product markets is particularly pronounced," J.P. Morgan analysts, led by Colin Fenton, said in a report.

Gains may be limited by worries that hurricane damage could prompt refiners to cut crude oil purchases in coming weeks and on heightened expectations the International Energy Agency (IEA) may release oil reserves as soon as September.

Brent crude rose 33 cents to $112.59 per barrel by 0857 GMT, while U.S. crude gained 57 cents to $96.04.

Brent rose to as high as $115.50 on Monday, gaining nearly $2 as U.S. refiners shut facilities on the Gulf Coast ahead of Isaac, before closing at $112.26, while U.S. oil had touched a session-peak of $97.72.

Energy companies have slashed crude production by 78 percent in the Gulf of Mexico, regulators said on Monday.

Shut-ins are expected to increase over the next few days In the region, which accounts for nearly a fourth of U.S. oil output and 7 percent of its natgas output.

Rain and storm force winds were expected to spread into the region in the coming hours, the U.S. National Hurricane Center said, as computer forecast models increasingly showed to storm likely to make landfall late on Tuesday near southeastern Louisiana as a full-blown hurricane.

Stimulus hopes

Investors are also focusing on a meeting of Federal Reserve officials in Jackson Hole, Wyoming, which will be marked by a closely-watched speech by Chairman Ben Bernanke on Friday, for cues on the possibility of further monetary stimulus.

Bernanke has used the event for the past two years to indicate the Fed's policy intentions. European Central Bank President Mario Draghi will also speak at the event on Saturday.

The Fed meeting will be followed by the ECB's policy meeting on September 6 and then the German Constitutional Court's ruling on the euro zone's permanent bailout fund on September 12, which may provide clarity on the ECB's bond-buying plans.

Stocks, bonds, the euro and oil have risen in recent days on hopes of further easing by the Fed and bond purchases by ECB.

"Oil is doing what a lot of risk assets are doing these days," said Ric Spooner, chief market analyst at CMC markets in Sydney.

"We are now at a watershed level, after a significant rally and there is a reluctance to push prices above current levels, until we get details beyond the initiatives."

Adding to supply worries, a fire burned for a third day in two fuel storage tanks at Venezuela's biggest refinery on Monday, raising doubts about its plans to restart operations quickly.

Traders are also awaiting data on U.S. inventory due later on Tuesday, which is expected to show that crude stockpiles fell for a fifth straight week due to lower imports.

In related news, Iran has indicated it might allow diplomats visiting Tehran for this week's Non-Aligned Movement (NAM) summit to go to the Parchin military base, which U.N. nuclear experts say may have been used for nuclear-related explosives tests.