NEW YORK (Reuters) - Dolly, the 2008 Atlantic season's second hurricane, was downgraded to a tropical storm early Thursday as it moved further inland in South Texas, the U.S. National Hurricane Center said in its latest report.

In its 5 a.m. EDT advisory, NHC said Dolly was located about 95 miles northwest of Brownsville, moving west-northwest at 7 miles per hour with winds down to 60 mph.

Dolly was expected to weaken as it moved further inland, dumping up to 12 inches of rain and causing widespread flooding.

Energy traders closely watch storms that enter the Gulf of Mexico and threaten U.S. oil and gas production facilities.

Dolly strengthened into a category two hurricane with winds of 100 mph before hitting the South Texas coast Wednesday afternoon. But its track was too far south to damage or disrupt Gulf of Mexico gas supplies.

Several oil and gas producers evacuated some staff from offshore Gulf platforms as a precaution against the storm, but the reported impact on production was minimal.

The U.S. Minerals Management Service said Wednesday that Dolly had forced producers to shut in nearly 5 percent of Gulf oil output, or about 58,000 barrels per day, and about 8 percent of gas output, or 606 million cubic feet per day.

So far this week, producers shut in a total of about 1 billion cubic feet of natural gas output due to the storm.

Commodities traders also watch storms that could hit agriculture crops like cotton in Texas and citrus in Florida.

An intermediate advisory will be issued by the NHC at 8 a.m.

(Reporting by Joe Silha, editing by John Picinich)

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