Updated from 12:09 p.m. EDT

Crude prices slipped nearly $2 Monday after Tropical Storm Ernesto weakened, reducing the threat it would hit oil installations in the Gulf of Mexico.

Light sweet crude for October delivery shed $1.90, or 2.6%, to a one-week low of $70.45 a barrel on Nymex. Gasoline gave back 11 cents to $1.78 a gallon, and heating oil dipped 6 cents to $1.96 a gallon.

Natural gas was down 69 cents to $6.47 per million British thermal units on lofty supply levels and cooler temperatures, which reduce the need for air conditioning. Natural gas is used to produce electricity.

Monday morning, Ernesto was downgraded to a tropical storm and made landfall on Cuba's southern coast. The storm was 500 miles south of Florida and is expected to strengthen into a hurricane within 36 hours. A hurricane watch was in effect for the southern tip of the Florida peninsula.

There have been only five named storms and no hurricanes this year, down from 28 last year. Still, the peak hurricane season lasts until October. Energy prices have surged every time a tropical storm threatens to become a hurricane and barrel through the Gulf of Mexico, where as much as a quarter of the country's natural gas and oil production is located.

Last year, hurricanes Katrina and Rita tore through the Gulf Coast, driving prices to all-time highs and closing petroleum production for weeks. But repairs have been slow to come, and a year later, 12% of the area's oil output and 9% of natural gas output remains offline.

The drop in energy prices comes despite tense negotiations with Iran, the world's fourth-largest crude producer, over its refusal to halt uranium enrichment. The U.N. has given Iran until Thursday to stop its nuclear program or face economic sanctions, but thus far, Iran has shrugged off the threats. Instead, Iran has said it would expand its nuclear program. On Saturday, Iranian President Mahmoud Ahmadinejad unveiled a heavy-water reactor, which can be used for weapons production.

After a two-year hiatus, Iran restarted uranium enrichment, ostensibly to generate more power for its growing population. The West, however, believes Iran wants to make nuclear weapons.

Although Iran responded to an incentives package last week aimed at giving Tehran trade inducements to roll back its nuclear program, the reply did not address uranium enrichment, a key part to the incentives. U.N. Security Council members are now discussing their next moves, though the U.S. said on Saturday it would hit Iran with sanctions if the group refused to act.

In stock action, shares of drillers and refiners on the Amex Oil Index were falling 1.2%, with Marathon Oil ( MRO - Get Report), Valero Energy ( VLO - Get Report) and Anadarko Petroleum ( APC) posting the largest declines, down about 2%. Only Repsol and Total ( TOT - Get Report) were advancing, up 0.4%.

Shares of Valero, Sunoco and Tesoro ( TSO) were falling from 1% to 3% after investment bank Friedman, Billings & Ramsey cut its price targets on the refiners, citing declining margins.

Mergers were boosting share prices of several energy companies Monday. Western Refining ( WNR) said it would buy fellow oil refiner Giant Industries ( GI) for $1.23 billion in cash plus the assumption of debt. The deal would make the combined company the fourth-largest independent refiner in the country. Shares of Western were recently down 61 cents to $25.38, while Giant shares were soaring $10.07, or 14%, to $81.86 in recent trading.

Natural gas pipeline operator Kinder Morgan ( KMI - Get Report) will be taken private by a group, including the company's chief executive officer, for $15 billion in cash and $7 billion in debt. Shares of Kinder Morgan have soared over the past three months since the offer was first leaked. Kinder Morgan's stock was recently up $2.49, or 2.5%, to $104.19.

Woodside Petroleum of Australia offered to buy independent oil driller Energy Partners Limited ( EPL) for $1.2 billion in cash, Dow Jones reported. The deal, however is contingent on EPL shareholders rejecting a merger with Stone Energy ( SGY) for $1.4 billion. The news sent shares of Stone down 8% to $43.90, and EPL higher by 31% to $24.09.