Sept. 25 (Bloomberg) -- Crude oil fell below $79 a barrel in New York as production resumed after a storm passed through the Gulf of Mexico and Saudi Arabia's oil minister said energy markets are ``in turmoil.''

``The market is in turmoil, let's leave it at that,'' the minister, Ali al-Naimi, said today in an interview in New York. He wouldn't comment further.

Crude oil fell as low as $78.96 a barrel on the New York Mercantile Exchange today as output increased in the Gulf. Prices have risen 31 percent since Jan. 18 as demand increased and OPEC members curtailed output. Prices shot to a record after an OPEC decision last week raised concern that supplies would be insufficient to meet demand during the winter.

``To a certain extent, Al-Naimi's right, the market has got completely confused with the financial aspects, the banking in collapse,'' said Rob Laughlin, a senior broker at MF Global Ltd. in London. ``He's just saying the recent spike up is overdone, and they're looking for an understandable correction.''

U.S. crude-oil inventories in the week ended Sept. 14 were 7.4 percent higher than the five-year average for the period, the Energy Department said last week. Supplies probably dropped 2.15 million barrels last week, according to the median of responses by 16 analysts surveyed by Bloomberg News.

The department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington.

``If tomorrow's crude numbers are a bullish surprise, we could get one more rally before this thing moves lower,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

Oil companies have resumed 96 percent of the production shut last week when the storm formed in the eastern Gulf, according to a U.S. government report today.

Crude oil for November delivery declined $1.42, or 1.8 percent, to settle at $79.53 a barrel at 2:42 p.m. in New York. It was the third-straight decline. Prices are 29 percent higher than a year ago. Prices reached records for seven straight days through Sept. 20 on the storm warning, the falling U.S. dollar and a spate of inventory declines.

OPEC Production

The Organization of Petroleum Exporting Countries agreed on Sept. 11 in Vienna to increase oil production for the first time in more than a year on concern crude prices above $80 a barrel would damage the world economy. Saudi Arabia, OPEC's largest member of, led the group to agree to the 500,000 barrels a day production increase, which starts in November.

``We shot too high and the buyers aren't interested in oil that's above the $80 mark,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant. ``The tropical depression didn't do very much and all of the shut-in platforms are coming back quickly. There's a great sense of relief.''

Refiners minimize crude-oil deliveries at this time of year because this is when they shut units for maintenance. Demand for refined products drops in September and October between the summer driving season and the winter months.

``This is a long overdue correction,'' said Tom Bentz, a broker at BNP Paribas in New York. ``We ended trading on a negative note yesterday and when we failed to hold $80 the buyers disappeared. On the fundamental front, refiners are shutting units so demand is going to fall.''

McKee Refinery

Valero Energy Corp said fuel output at its McKee plant near Sunray, Texas, will be reduced for 14 days because of repair work. The closure of the McKee refinery in February bolstered crude-oil stockpiles at Cushing, Oklahoma, where West Texas Intermediate crude oil, the U.S. benchmark, is delivered.

``Valero just announced that they will be doing work at McKee, which should reduce demand for WTI,'' Bentz said.

Brent crude oil for November settlement fell $1.29, or 1.6 percent, to close at $77.62 a barrel on the London-based ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: September 25, 2007 16:32 EDT