Updated from 11:06 a.m. EDT

Oil prices fell back Friday on strong fuel supplies and the possibility of improving relations with Iran, the world's fourth-largest crude producer.

Light, sweet crude for November delivery shed $1.04 to $60.55 a barrel on Nymex. Earlier this morning, oil prices were rising on worries that OPEC would cut production to shore up prices, and traders bought contracts to cover short positions.

All of the gains oil prices racked up in the past year have essentially been erased, with crude closing in on fresh six-month lows. Robust levels of winter heating fuel and crude, which are 5% to 11% higher than last year, have helped keep prices sluggish. September is typically a soft month for fuel consumption since temperatures are mild and gas-fired utilities do not need new supplies.

Oil prices have risen and fallen on the progress of talks with Iran over its nuclear program. The U.N. and Iran have been battling over Iran's resumption of nuclear development since February, and traders have been following the standoff intently.

Iranian President Mahmoud Ahmadinejad provided a glimmer of hope late Thursday after he said his country does not need nuclear weapons and was unsure how to prove that, the

Associated Press

reported.

The foreign minister of Russia, which has weighed against levying sanctions against Iran, said there was a chance Iran will resume negotiations with the West over its nuclear program.

Several members of the U.N. Security Council contend that Tehran wants to build atomic weapons, an allegation Iranian officials have denied. Rather, enriching uranium, they say, is meant to help produce power for that country's growing population.

As prices descend to $60 a barrel, the prospect of OPEC trimming output becomes greater. Some ministers have said they would defend $60, which would entail cutting production among their member countries.

"There is already some evidence that OPEC has reduced production from the Middle East and is committed to supporting high prices," according to a Morgan Stanley research note Friday.

The Saudi oil minister Ali al-Naimi said Tuesday that he thought oil prices were reasonable instead of too high, as he usually says. Some analysts believe OPEC, which produces 40% of the world's crude, would likely reduce production if the group's basket price, an average of 11 different crudes, fell to $55. It now stands at $55.99.

"Look for OPEC to cut production by spring," said James Williams, an energy analyst at WTRG Economics in London, Ark. "It is not likely they will attempt to defend prices before December unless the price drops another $10."

Wholesale unleaded gasoline lost 2 cents to close at $1.47 a gallon, and heating oil gave back 3 cents to $1.64 a gallon. The two fuels typically trade in tandem with crude.

Little hurricane activity and strong inventories of natural gas in storage drove down prices by 15 cents to $4.62 per million British thermal units. On Thursday, the October contract fell to a two-and-a-half-year low on the same fundamentals.

The U.S. Energy Department reported in its weekly update Thursday that domestic supplies increased by 93 billion cubic feet last week. They currently stand 13% above the five-year average.

Hurricane Helene, though it was moving northeast across the Atlantic and 560 miles to the east of Bermuda, was not expected to make landfall. On Thursday, the storm weakened and started moving away from the U.S. Helene is the eighth named storm of the hurricane season, which has been quiet this year. The hurricane season runs from June through November, with September being the peak month.

In stock market action, energy stocks were trading from 0.7% to 1.2% lower on the Philadelphia Oil Service and Amex Oil Indices.

BP

(BP) - Get Report

,

Valero Energy

(VLO) - Get Report

,

Sunoco

(SUN) - Get Report

,

Occidental Petroleum

(OXY) - Get Report

and

Anadarko Petroleum

(APC) - Get Report

were the leading decliners on the 13-company Amex Oil Index.

The largest publicly traded energy company,

Exxon Mobil

(XOM) - Get Report

, was the only company posting increases on the index, up 0.2% at $64.92.

Morgan Stanley's upgrade of BP did little to help the stock Friday, with shares down 1% to $65.31. Despite a rash of problems including the shutdown of the country's largest oil field, BP's rating was increased from "underweight" to "equal weight" based on a projected increase in earnings next year of 6.7%.

Royal Dutch Shell

(RDS.A)

lost ground after the investment bank cut its rating on the oil giant from equal-weight to underweight. Next year, earnings are expected to climb by 4.7%. Shares were recently slipping 0.9% to $65.07.

Halliburton

(HAL) - Get Report

was climbing 0.6% to $28.27 after the oil service company said it would increase its buybacks up to $2 billion. In February, Halliburton started buying back $1 billion in shares, and has repurchased $983 million thus far.