Oil drops below $110 as Gustav fades

Business Materials 3 September 2008 02:38 (UTC +04:00)

Oil fell below $110 a barrel on Tuesday for the first time since April as traders bet the U.S. oil industry would recover quickly from Hurricane Gustav.

Early indications that oil installations suffered only minor damage from the storm returned the market's focus to bearish factors including slowing global energy demand growth, rising inventories and a stronger U.S. dollar.

U.S. crude settled down $5.75 at $109.71 a barrel after trading as low as $105.46. London Brent crude settled down $1.07 at $108.34 a barrel.

U.S. crude settled below its 200-day moving average price for the first time since May 2007, which is considered by many traders evidence that prices may fall further. Oil prices have tumbled nearly $40 a barrel since the July 11 record high of $147.27 as bullish sentiment has evaporated.

"It would take a really major storm to change the direction in crude oil in the midst of its major correction since July, and Gustav is not it," said Chris Jarvis, senior analyst at Caprock Risk Management in Hampton Falls, New Hampshire."

A third of U.S. refining capacity has been affected in some way by Gustav, with at least 10 plants completely shut down. Early inspections have not turned up any significant damage at the shuttered facilities.

All of the 1.3 million barrels per day of oil production in the Gulf of Mexico, a quarter of U.S. domestic production, was shut, though no damage to platforms or any oil spills were noted during inspection flights conducted by the U.S. Coast Guard on Tuesday.

"If it were not for these (storm) threats, we would have been testing $100 already," said Mike Wittner, energy analyst at Societe Generale.

Oil traders have been nervous about hurricanes since hurricanes Katrina and Rita devastated the U.S. oil industry in 2005, wrecking over 100 offshore platforms and shutting several major refineries for months of repairs.

Tropical Storm Josephine, the 10th named storm of the Atlantic hurricane season, formed off West Africa on Tuesday.

The International Energy Agency, which had been prepared to release emergency oil stocks in the event Gustav caused severe damage, announced on Tuesday it saw no need for emergency supplies.

Hurricane Ike continued to move westward across the Atlantic and was projected to be in the vicinity of the Bahamas by Sunday, according to the U.S. National Hurricane Centre, Reuters reported.