Updated from 1:03 p.m. EDT

Crude futures reversed earlier gains and fell Monday on expectations that an Energy Department report this week will show a robust build in gasoline inventories. Traders were shrugging off Iran's refusal to halt its nuclear program and the first named storm of the hurricane season.

Light, sweet crude lost $1.27 to $70.36 a barrel on Nymex. The contract traded as high as $72.32 in morning trading before traders discounted the storm because it wasn't expected to damage the Gulf Coast's oil installations.

In a

Bloomberg

poll of analysts, gasoline supplies were projected to increase for the seventh week in a row. Estimates called for a rise of 1.4 million barrels of gasoline in the U.S. Energy Department's weekly petroleum update due out on Wednesday. An increase would help cover demand during the peak summer driving season.

Distillates were projected to climb by 1.2 million barrels as imports soar and refiners increase operations. Refinery operations were expected to climb 0.4 percentage point to 91.4% last week. Crude, which is processed into gasoline and other petroleum products, likely fell by 700,000 barrels.

European diplomats hammered together an offer designed to persuade Iran to halt uranium enrichment and presented it last Tuesday. The offer includes trade incentives, an offer to build a light-water nuclear reactor and a promise the U.S. will join the negotiations. Iran, which has several weeks to respond to the proposal, didn't sound conciliatory in its formal communications Monday.

"It is our absolute right and we do not negotiate over our absolute nuclear rights," Gholamhossein Elham, Iran's spokesman, said Monday, the British newspaper the

Telegraph

reported.

Still, Iran's Foreign Ministry spokesman said on Sunday that some parts of the package were acceptable, while others needed work. He did not elaborate.

Concerns over the standoff with Iran were boosted by comments from the head of the U.N.'s nuclear watchdog that Iran was not cooperating with the group. However, the International Atomic Energy Agency's board, which is met in Vienna on Monday, declined to pass any resolutions against Iran while negotiations were ongoing.

Oil prices have been rising and falling on negotiations with Iran because the country is the world's fourth-largest crude producer and controls the Strait of Hormuz, a waterway through which 17 million barrels of oil travel every day. The energy markets are concerned global oil supplies could be cut if the impasse is not resolved with Iran.

Although Tropical Storm Alberto was gaining strength in the Gulf of Mexico and was expected to make landfall in northern Florida on Tuesday, energy traders were dismissing the storm because it wasn't likely to affect the region's oil industry. Forecasters issued a hurricane warning for sections of Florida's Gulf Coast. Oil companies were watching the storm closely, with

Devon Energy

(DVN) - Get Report

evacuating its workers from a deepwater platform in the Gulf of Mexico.

Oil prices typically rise after a tropical storm has been spotted because much of the country's oil industry is located in the Gulf of Mexico, particularly when one forms this early. Last year, hurricanes Katrina and Rita closed down most of the region's oil industry and forced prices to their highest level since the early 1980s.

Two weeks into the hurricane season, 15% of the gulf's oil production and 11% of its natural gas output is still offline. The hurricane season starts June 1 and ends Nov. 30.

A pipeline fire in Oklahoma had little effect on prices of petroleum products. Explorer Pipeline of Tulsa, Ok., which operates a 1,400-mile pipeline from the Gulf Coast to the Midwest, closed a pipeline running into and out of Tulsa because of a tank fire. Explorer is owned by subsidiaries of

ConocoPhillips

(COP) - Get Report

,

Chevron

(CVX) - Get Report

,

Marathon Oil

(MRO) - Get Report

and

Royal Dutch Shell

(RDS.A)

.

The drop in crude futures drove down prices of heating oil and gasoline by 1 cent to $1.99 a gallon and $2.12 a gallon, respectively. Natural gas added 5 cents to $6.22 per million British thermal units.

The shutdown of

Valero's

(VLO) - Get Report

refinery on the Caribbean island of Aruba due to a power failure was also propping up prices on Monday. The refinery can process up to 275,000 barrels of crude per day into distillates and petrochemicals, much of it destined for the U.S.

In trading, energy shares were lower, with oil drillers and explorers losing 1% to 4% on the Amex Oil Index and the Philadelphia Oil Service Index.

Sunoco

(SUN) - Get Report

, Valero,

Kerr-McGee

(KMG)

and

Hess

(HES) - Get Report

were leading the declines on the Amex Oil Index.

Weatherford International

(WFT) - Get Report

,

Tidewater

(TDW) - Get Report

and

Global Industries

(GLBL)

were posting the largest drops among oil service companies.