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NEW YORK (Reuters) - Brent crude oil futures fell toward $112 a barrel on Monday, reversing early gains as Tropical Storm Isaac shuttered refineries on the U.S. Gulf Coast, cutting demand for crude.
Traders were also eyeing the possibility of western governments releasing strategic oil reserves to moderate prices, with some analysts suggesting the storm could provide the trigger.
After U.S. trading closed, the National Hurricane Center (NHC) said Isaac will probably be a Category 2 hurricane when it makes landfall in Louisiana on either Tuesday night or Wednesday morning. Earlier, it had forecast it would be a Category 1 hurricane, which is weaker than Category 2.
While crude prices fell on lower demand, gasoline prices jumped as U.S. energy companies started shutting refineries ahead of a possible 12-foot (3.6-meter) storm surge. The Gulf Coast is home to almost 45 percent of U.S. refining capacity.
"Traders realize that there is more refining capacity at risk from this storm, and that the risk is also to oil consumption," said analyst Tim Evans at Citi Futures Perspective in New York.
"That's why we see today that crude prices are off and near-term gasoline prices are rising. It is similar to the price action we had ahead of Hurricane Katrina."
Brent crude futures fell $1.33 to settle at $112.26, well off the session high of $115.50 a barrel. Traders said they were watching the front-month contract's 200-day moving average of $111.43, a key technical indicator.
U.S. crude fell 68 cents to settle at $95.47 a barrel, off the session high of $97.72. RBOB gasoline futures hit a near four-month peak of $3.2050 a gallon, before settling at $3.1548 a gallon, up 2.5 percent.
Trade was light due to a holiday in London, with volumes for both major crude benchmarks about 20 percent below the 30-day average.
Isaac is forecast to become a hurricane on Tuesday and make landfall in Louisiana by Wednesday, seven years to the day since Hurricane Katrina devastated New Orleans and knocked out 4.5 million barrels per day of U.S. refining capacity.
Isaac is expected to be weaker, however, making landfall as a Category 2 hurricane with winds of 96 to 110 miles per hour (154-177 km/h) when it hits the Gulf Coast. Katrina was a Category 3 hurricane when it made landfall in Louisiana.
Oil prices have risen nearly 30 percent since June with international sanctions hitting Iranian exports and maintenance affecting North Sea oil flows.
"With refineries shutting down along the U.S. Gulf Coast, traders are weighing this up and seeing there may be a glut of crude oil in the market," said Carl Larry, analyst at OilOutlooks in New York.
"Isaac is also adding to talk of a possible release from the Strategic Petroleum Reserve, so traders are cautious at these levels after a two-month long rally," he added.
Reuters reported earlier this month that the White House was "dusting off" old plans for a possible release of oil reserves on fears that rising crude prices could undermine the effect of sanctions on Iran.
The International Energy Agency, whose chief recently dismissed the need for a coordinated release, is now thought to have agreed to the idea, an industry journal said on Friday.
Companies including Marathon Petroleum (MPC.N) , Chevron (CVX.N) and Phillips 66 (PSX.N) closed -- or were in the process of closing -- at least 1.1 million barrels per day (bpd) of capacity in Louisiana, according to industry and government estimates.
In another indication that regional crude stocks could rise, a fire burned for a third day at Venezuela's biggest refinery on Monday, raising doubts about a speedy restart to operations.
U.S. oil production has fallen, however, as U.S. energy companies shut offshore rigs in the Gulf of Mexico, home to 23 percent of total U.S. production.
More than 78 percent of Gulf of Mexico oil production was shut-in, the U.S. Bureau of Safety and Environmental Enforcement said, up from 24 percent the previous day.
Oil prices hit a session high of $115.50 a barrel partly on hints of another round of monetary stimulus by the U.S. Federal Reserve ahead of a meeting with Fed Chairman Ben Bernanke later this week.
Oil prices fell from highs after German business sentiment dropped for a fourth month in a row in August to reach its lowest level since March 2010, stoking concerns about the impact of the euro zone crisis on Europe's largest economy.
For a 24-hr chart analysis on U.S. crude:
For a 24-hr chart analysis on Brent:
Additional reporting by Robert Gibbons and Joshua Schneyer in New York and Emma Farge in Geneva; Editing by James Jukwey, Sofina Mirza-Reid; Bob Burgdorfer, Steve Orlofsky and David Gregorio