UPDATE 2-Oil falls below $78 as Alex may skirt U.S. production

                                
 * Alex may reach US-Mexico border as hurricane
                                
 * For a technical view, click: [ID:nSGE65S00V]
                                
 * Coming Up: EIA US inventory report; 1430 GMT
 (Adds falling stock markets, stronger dollar, updates prices)
                                
 By Alejandro Barbajosa
                                
 SINGAPORE, June 29 (Reuters) - Oil fell 0.9 percent to
below $78 on Tuesday as forecasts indicated tropical storm Alex
would skirt the main production region in the U.S. Gulf of
Mexico, limiting disruption there to a few precautionary
shutdowns.
                                
 The price drop accelerated with slumping Asian stock
markets. Shanghai's main index fell to a 14-month low, while
Japan's Nikkei was poised for its worst quarter since
October-December 2008 as European debt worries curbed
investors' risk appetite.
                                
 U.S. crude for August <CLc1> dropped 70 cents to $77.56 a
barrel by 0555 GMT, after falling 0.77 percent on Monday and
rising 21 percent from a May 20 trough below $65. ICE Brent
<LCOc1> declined 54 cents on Tuesday to $77.05.
                                
 The U.S. National Hurricane Center forecast Alex, located
about 520 miles (835 km) southeast of Brownsville, Texas, would
make landfall as a hurricane near the Texas-Mexico border early
Thursday. [ID:nN28267830]
                                
 "The path of the storm looks too soft to cause any major
supply disruption," said Serene Lim, a Singapore-based oil
analyst at ANZ. "All of this has been priced in and there is a
possibility that on confirmation of this there could be further
downside for oil."
                                
 Prices fell on Monday as the negative effect of a stronger
dollar, which makes oil more expensive for Asian and European
buyers, outweighed optimism about a better-than-expected report
on U.S. consumer spending. The euro was under pressure on
Tuesday because of funding concerns about the euro zone.
                                
 Banks must repay 442 billion euros ($545.5 billion) to the
European Central Bank on Thursday, leaving a potential
liquidity shortfall in the financial system of over 100 billion
euros. [ID:nLDE65R0LE]
                                
 "Markets are concerned that European banks are pressed to
pay 442 billion euros. If those worries sustain and the euro
falls, a stronger dollar would pressure oil prices down," ANZ's
Lim said.
                                
 The dollar strengthened by more than 0.1 percent against a
basket of currencies on Tuesday. <.DXY>
                                
 ALEX A HURRICANE?
                                
 Alex, which was moving slowly north-northwest, was expected
to strengthen into the first hurricane of the Atlantic season
on Tuesday, the NHC said in latest advisory on Monday.
                                
A tropical storm, where the maximum sustained surface wind
speed ranges from 39 to 73 miles per hour or 63 to 118
kilometeres per hour (kph), is weaker than a hurricane, where
sustained winds are 119 kph or faster.
                                
 Shell Oil Co <RDSa.L> said on Monday it was shutting
production from its western and central Gulf of Mexico assets
ahead of Alex. [ID:nWEN6394]
                                
 For a factbox on preparations for Alex: [ID:nN28268353]
                                
 Two of Mexico's three main oil exporting terminals remained
closed on Monday afternoon as Alex churned north in the Gulf of
Mexico, the government said. The Dos Bocas and Cayo Arcas
ports, which ship more than 1.1 million barrels per day (bpd)
of Mexican crude, were shut on Sunday as the storm approached.
[ID:nN28197154]
                                
 Mexican state-run oil giant Pemex said on Monday its
offshore facilities in the Campeche sound continued to operate
normally despite Alex strengthening in the Gulf of Mexico.
[ID:nN28266348]
                                
 And U.S. oil inventories remain higher than normal,
potentially buffering the impact of weather-related disruptions
on U.S. output.
                                
 Inventories of distillate fuel, a category that includes
heating oil and diesel, probably rose 900,000 barrels last
week, according to a Reuters survey on Monday.
                                
 Crude stockpiles fell by 1.1 million barrels due to a
decline in imports, the preliminary poll showed, while gasoline
supplies may have slipped by 400,000 barrels. [ID:nN28271739]
                                
 Industry group American Petroleum Institute (API) releases
inventory data for the week to June 25 on Tuesday at 2030 GMT,
followed by government statistics from the Energy Information
Administration (EIA) on Wednesday at 1430 GMT.
                                
 BP Plc <BP.L><BP.N> said on Monday its plan to nearly
double the amount of oil it can capture from the Gulf of Mexico
leak will be delayed for about a week by high waves expected
from Alex. [ID:nN28258499]
                                
 The U.S. National Oceanic and Atmospheric Administration
forecast 14 to 23 named storms for this year's season, with
eight to 14 developing into hurricanes. Three to seven of those
could be major Category 3 hurricanes or above. [ID:nN2798815]
 (Editing by Clarence Fernandez)