Oil drops as Gustav weakens


Published: Monday, September 1, 2008 at 11:21 a.m.
Last Modified: Monday, September 1, 2008 at 11:21 a.m.

Oil prices fell sharply Monday as weather forecasters said Hurricane Gustav was weakening as it advanced toward Louisiana.

A stronger dollar also helped reverse the course for oil prices, which had risen by nearly $3 a barrel earlier in the session.

Still, precautions due to Gustav prompted companies to shut down drilling and refining operations in the Gulf Coast region.

By afternoon in Europe, light, sweet crude for October delivery was down $2.24 to $113.22 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it reached a high of $118.25 before retreating.

On Friday, the contract fell 13 cents to settle at $115.46 a barrel.

In London, October Brent crude was down $2.50 to $111.55 a barrel on the ICE Futures exchange. U.S. trading was closed Monday for Labor Day.

"There's no question the drilling platforms in the Gulf of Mexico and the big refineries between Houston and New Orleans are in the path of this hurricane," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "There's likely to be some damage. We could see an extended period of disruption."

Some analysts, however, said the market's response to Gustav was not as strong as some predicted. U.S. energy risk management firm Cameron Hanover described reaction as "extremely subdued."

"The best reasons we can give for that are the strength of the U.S. dollar, the continuing decline in consumer demand and the market's recent trend lower," a Cameron Hanover report said. "The reaction is telling us that this market just does not have the stomach it once did for higher prices."

Current crude supplies in the United States were "ample due to higher imports from the North Sea," said analysts at JBC Energy in Vienna, Austria, another possible reason for the lack of a rally in oil prices.

Oil companies are shutting down productions and evacuating facilities ahead of the storm. Exxon Mobil Corp., Royal Dutch Shell PLC and Valero Energy Corp., North America's largest refiner, were among the companies that said they had shut down Gulf Coast refineries, primarily in south Louisiana.

Altogether, about 2.4 million barrels of refining capacity have been halted, roughly 15 percent of the nation's total, according to figures from Platts, the energy information arm of McGraw-Hill Cos. The U.S. Gulf Coast is home to nearly half the nation's refining capacity.

Australia's BHP Billiton Ltd, which has an interest in eight projects in the Gulf, said Monday it had shut down production and evacuated personnel from its operations. Royal Dutch Shell PLC, BP PLC and Transocean Inc. have also evacuated employees from rigs in the Gulf region.

In 2005, Katrina and Hurricane Rita destroyed 109 oil platforms and five drilling rigs.

Forecasters had expected Gustav to strengthen further before making landfall around 1600 GMT, but they said Monday the storm had weakened to a Category 2, packing maximum winds of 110 mph. Katrina had made landfall as a strong Category 3, which carries sustained winds of between 111 mph and 130 mph.

"Observations from an Air Force hurricane hunter aircraft indicate that Gustav is not strengthening," the National Hurricane Center said.

At 1200 GMT Monday, the storm's center was located about 80 miles (137 kilometers) south of New Orleans and was moving northwest at 16 mph (26 kph).

About 1.9 million people have left the Louisiana coast region, the largest evacuation in state history, and thousands more had left from Mississippi, Alabama and flood-prone southeast Texas.

The storm has already killed at least 94 people on its path through the Caribbean, and comes three years after Hurricane Katrina killed 1,600, mostly from flooding in New Orleans.

In the U.S., the average retail gasoline price was down slightly to $3.686 a gallon, the auto club AAA, the Oil Price Information Service and Wright Express reported Monday. The price rose slightly more than a penny Saturday. Gasoline prices peaked on July 17 at $4.114 a gallon.

Keeping prices from rising further are concerns that the credit crisis, which began in the U.S. last year, has spread to other developed countries and may undermine global demand for crude.

"Worries about an economic slowdown spreading to the euro zone and worries that oil demand growth in emerging markets may slow later this year are creating the current bearish sentiment in the oil market," Shum said.

The dollar was stronger against the euro and the British pound Monday, while losing some ground against the Japanese yen, taking away some of the incentive from investors who tend to buy into commodities like oil to defend against dollar weakness and as a hedge against inflation.

By afternoon in Europe, the euro was trading at $1.4606, down from $1.4671 late Friday in New York, while the British pound fell to $1.8012 from $1.8218 in the previous session.

The dollar stood at 108.16 Japanese yen, down from 108.81 yen on Friday.

In other Nymex trading, heating oil futures fell 3.36 cents to $3.1583 a gallon, while gasoline prices lost 1.56 cents to $2.8428 a gallon. Natural gas for October delivery fell 28.2 cents to $7.661 per 1,000 cubic feet.

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