Oil steady at $127

By Jonathan Leff

SINGAPORE (Reuters) - Oil prices were little changed below $128 a barrel on Monday, with traders tracking the dollar for direction as fleeting Tropical Storm Arthur marked the start of the Atlantic hurricane season, shutting two Mexican oil ports.

U.S. light, sweet crude oil futures dipped 14 cents to $127.21 a barrel by 2325 GMT. Prices fell by nearly $5 last week as traders took profits from the previous week's record high above $135 on concerns over demand.

Oil managed modest gains on Friday, as the dollar's recovery stalled. The dollar inched down against the yen early on Monday, but market fundamentals also vied for traders' attention.

Tropical Storm Arthur became this season's first in the Atlantic at the weekend, opening a June-November hurricane period that forecasters expect to be more active than usual, threatening U.S. and Mexican oil facilities.

Although it quickly weakened into a tropic depression, Arthur forced authorities to shut two of Mexico's three main crude oil ports as a precaution. The three ports ship about 80 percent of Mexico's crude exports, most of which goes to U.S. refineries.

State oil monopoly Pemex says its export volumes are rarely hurt by temporary port closures, as it reschedules delayed shipments once the weather clears.

"In the near-term I think we'll be looking at issues around supply, the potential for disruption in key regions," said Gerard Burg, commodities analyst at National Australia Bank, noting the market will be more sensitive during the summer driving season.

"The peak (of hurricane season) isn't until September/October but obviously that'll be a concern later into the third quarter."