Oil fell below $78 a barrel on Wednesday as a tropical storm hitting the U.S. Gulf coast weakened, offsetting support from forecasts of lower U.S. inventories and sanctions against Iran.
Crude had jumped the previous day as oil companies shut dozens of offshore platforms in anticipation of damage from tropical storm Gordon. But by Wednesday the storm was weakening, reducing its threat to oil producers.
"Tropical storm Gordon made an uneventful landfall after dashing expectations that it would strengthen to a hurricane," said Stephen Brennock of oil broker PVM.
"Instead, it weakened considerably and deviated away from oil-producing areas, which, as a result, has taken the wind out of bulls' sails."
Brent crude, the global benchmark, fell 47 cents to $77.70 a barrel by 0832 GMT. On Tuesday prices had climbed to $79.72, their highest since May.
U.S. crude was down 72 cents at $69.15.
"Storm in a teacup," said analysts at JBC Energy, referring to Gordon's limited impact on oil pricing.
Oil could gain support if weekly reports on U.S. inventories show a drop in crude inventories, as expected. Analysts estimate, on average, that stocks fell by about 1.9 million barrels last week.
The American Petroleum Institute, an industry group, releases its supply report at 2030 GMT on Wednesday, a day later than usual because of the Labor Day holiday on Monday. Official government figures are due on Thursday.
Brent has traded between $70 and $80 since April; a range that Saudi Arabia and other producers in the Organization of the Petroleum Exporting Countries would like to see maintained for now, OPEC and industry sources have said.
U.S. sanctions targeting Iran's oil sector from November are already reducing exports from OPEC's third-largest producer and counteracting the impact of an agreement by OPEC and its allies to pump more oil.
"With the anticipation of up to 1.5 million barrels per day affected by the U.S. sanctions on Iran, one would expect prices to move higher in the weeks ahead," said Stephen Innes, of futures brokerage OANDA.
(Additional reporting by Henning Gloystein Editing by David Goodman)