LONDON (Reuters) – Oil held near $68 on Tuesday as traders waited nervously for news of damage in the wake of Hurricane Katrina”s rampage through the Gulf of Mexico, where most oil and gas production was at a standstill.

Gasoline and heating oil futures, which led the oil market”s rally on Monday to touch all-time highs above $2 a gallon, outpaced crude again as dealers feared refinery outages or delays in crude shipments would squeeze already tight supplies.

Oil prices roared to a record-high at $70.80 a barrel early on Monday, but cut gains to just over $1 as Katrina, one of the biggest hurricanes in U.S. history, eased before hitting the coast. It has since slowed to a tropical storm.

U.S. crude was up 76 cents at $67.96 a barrel at 0906 GMT as operators began to assess the extent of Katrina”s destruction after it churned through the Gulf, which pumps a quarter of U.S. oil and gas.

London Brent crude, resuming trade after Monday”s holiday, was up $1.66 a barrel at $66.53, catching up with New York gains.

More than 90 percent of the Gulf of Mexico”s oil output was shut as a precaution, the U.S. Minerals Management Service said.

That closed down 1.4 million barrels per day (bpd) of output, roughly 7 percent of U.S. domestic demand and about the same amount as the estimated spare capacity held by the Organisation of the Petroleum Exporting Countries (OPEC).

&#34We”re now in wait-and-see mode,&#34 said Gerard Burg, minerals and energy economist at National Australia Bank. &#34There was a pull-back after Katrina went through, but early indicators are certainly that some damage has been done.&#34

&#34It could be weeks before we know the full extent, but given how easily $70 was reached, it”s not out of the question that $80 could be the next barrier if there”s long-term damage to repair.&#34

The global oil industry can ill afford a lasting disruption in supplies to the world”s top consumer as most producers and refiners around the world have been working flat-out to meet two years of exceptionally strong demand growth.

Last September”s Hurricane Ivan, a weaker storm than Katrina but which took a similar path through the heart of the offshore U.S. oil patch, shut in a total of around 45 million barrels of crude production over six months.

The U.S. Coast Guard said it had received reports of oil platforms adrift in the Gulf, but operators had not yet been able to survey the full extent of the damage.

Although some refiners along the Gulf Coast also appeared to be in the path of Hurricane Katrina, several operators said their facilities were largely unharmed, providing some relief.

At its height the storm forced eight refineries in southeast Louisiana to shut, and two others to reduce operations, disabling more than 9 percent of total U.S. refining capacity and sparking fears of a squeeze that would be difficult to alleviate.

Gasoline prices surged 7 percent on Monday and stood 3.60 cents, or 1.75 percent, higher at $2.0966 a gallon in early Tuesday trade, while heating oil was 4.12 cents, or 2.27 percent, higher at $1.95 a gallon after a 4 percent surge.

The United States maintains a small government heating oil stockpile in the Northeast but otherwise has limited ability to quickly meet any sudden fuel shortfalls, especially with inventories low and most refiners already working full throttle.

The administration said on Monday it was willing to consider loaning crude from its 700-million-barrel Strategic Petroleum Reserve (SPR) if refiners requested oil.

Late on Monday, Citgo Petroleum said it requested some 250,000 to 500,000 barrels to ensure its Lake Charles, Louisiana plant continues running.

Top oil exporter Saudi Arabia said on Monday it was ready to boost its oil output to 11 million bpd to fill any supply shortages caused by Hurricane Katrina, but that largely failed to allay market fears of a squeeze on oil products.

Oil Minister Ali al-Naimi told the state news agency SPA that the OPEC giant was in touch with its customers, especially in the United States, to assist in any supply shortfall, but said world oil markets were currently &#34well balanced&#34 and supplies adequate.

Earlier, OPEC”s President Sheikh Ahmad al-Fahd al-Sabah said he would propose the group raise both real oil output and its production target by 500,000 bpd at its meeting in September.