OIL prices tumbled to US$111 a barrel yesterday as Hurricane Gustav weakened along the US Gulf Coast and posed less of a threat to oil drilling and refining operations.
A stronger dollar also helped send oil lower after crude gained nearly US$3 to trade above US$118 a barrel in anticipation of Gustav's hitting Louisiana. Light, sweet crude for October delivery was down US$4.34 at US$111.12 in late afternoon electronic trading on the New York Mercantile Exchange. On Friday, the contract fell 13 cents to settle at US$115.46 a barrel.
In London, October Brent crude was down US$4.32 at US$109.73 a barrel on the ICE Futures exchange. US trading was closed yesterday for the Labor Day holiday.
Before Gustav reached the Gulf Coast, investors were concerned about heavy damage that would disrupt oil operations. Some analysts, however, said the market's response to Gustav was not as strong as some predicted. US energy risk management firm Cameron Hanover described reaction as "extremely subdued."
"The best reasons we can give for that are the strength of the US 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 lasting rally in oil prices.
Still, there was some disruption due to Gustav, and by yesterday afternoon, the extent of any damage was not known. Oil companies had shut down productions and evacuated 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 had been halted, roughly 15 percent of the nation's total, according to figures from Platts, the energy information arm of McGraw-Hill Cos. The 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 yesterday 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, Hurricanes Katrina and Rita destroyed 109 oil platforms and five drilling rigs.
Keeping prices from rising further are concerns that the credit crisis, which began in the US 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," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.
The dollar was stronger against the euro and the British pound yesterday, 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 US$1.4615, down from US$1.4671 late Friday in New York, while the British pound fell to US$1.8011 from US$1.8218 in the previous session.
The dollar stood at 108.12 Japanese yen, down from 108.81 yen on Friday.
In other Nymex trading, heating oil futures fell 10.93 cents to US$3.0826 a gallon, while gasoline prices lost 10.92 cents to US$2.7450 a gallon. Natural gas for October delivery fell 43.8 cents to US$7.505 per 1,000 cubic feet.