Oil prices tumbled on Tuesday as companies said they don't expect crude production to be disrupted by tropical storm Dolly in the western Gulf of Mexico.

Dolly is expected to make landfall near the U.S.-Mexico border late Tuesday or early Wednesday as a Category 1 hurricane.

On the New York Mercantile Exchange, light, sweet crude for August delivery fell $3.09 US a barrel to close at $127.95. Earlier in the trading session, oil got as low as $125.63 and as high as $132.07.

"The market doesn't see Dolly as a real threat at this point," said Victor Shum, an energy analyst with consulting firm Purvin & Gertz Inc. in Singapore. "It doesn't look like it will have much of an impact."

On Monday, Shell said it was pulling employees off rigs in part of the western Gulf as a precautionary move. Oil fell more than $16 US a barrel last week after hitting a record high of $147.27 on July 11.

"This is more of the long exit from the market by the hedge funds," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, speaking on Tuesday's decline. "A lot of these investors who have been supporting prices are hitting the road."

Tuesday is the last day of trading for the August futures contract, which expires with the end of NYMEX floor trading. The September contract will then become the front-month contract.