Oil prices plunge as Gustav fears fade
Posted: 03 September 2008 0404 hrs

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NEW YORK: Oil prices plunged more than five dollars in New York on Tuesday after Hurricane Gustav appeared to have wreaked less damage than feared to Gulf of Mexico energy facilities.

New York's main contract, light sweet crude for October, dropped 5.75 dollars from Friday to close at 109.71 dollars a barrel. It had tumbled as low as 105.46 dollars in intraday trade.

The New York market was closed on Monday for a holiday when Hurricane Gustav slammed ashore, then progressively weakened into a tropical storm.

In London, Brent North Sea crude for October fell to 104.14 dollars at one stage on Tuesday, hitting levels last seen on April 4. It later settled at 108.34 dollars, a decline of 1.07 dollars from Monday's close.

"What Gustav has made clear is that the bull market in energy was hanging in on the hope that some type of event would happen that would save the bulls," said Phil Flynn, analyst at Alaron Trading.

"It now looks like that is unlikely to happen. As the reality of this storm is now becoming clear, energy bulls are on the run and market is finally facing up to the realities surrounding it."

Falling demand for crude oil because of a slowing global economy has caused prices to drop from record highs of more than 147 dollars a barrel on July 11.

According to the US Department of the Interior, there was no oil production on Tuesday in the hurricane-affected region, where a quarter of US oil is produced, and 95 percent of natural gas production was offline.

Andy Lipow of Lipow Oil Associates in Houston, Texas, said that oil refining capacity was shut in by nearly three million barrels a day, 17 percent of total US refining capacity.

Although the oil sector had braced for Gustav's arrival with memories of Hurricane Katrina's devastation three years ago - oil platforms toppled, refineries flooded, installations out of service for several months - the worst appears to have been avoided.

RMS, a consultancy specialised in risks linked to natural catastrophes, estimated that Gustav's damage to oil installations would cost between one and three billion dollars.

Helping drive oil prices lower was a strengthening dollar. The euro fell on Tuesday below 1.45 dollars, its lowest level since early February.

Since the global financial crisis that began a year ago, investors have tended to shy away from the dollar, pushing up dollar-denominated commodities. According to analysts, the opposite trend is now underway.

A stronger dollar makes oil more expensive for buyers paying in other currencies, reducing demand and thus lowering prices.

As oil prices fell, Iran called for the Organisation of the Petroleum Exporting Countries, which produces 40 percent of world output, to discuss excess supply at its meeting in Vienna on September 9.

"The oil supply should be proportionate to demand and control of excess supply is an issue which should be addressed at the upcoming OPEC meeting," Oil Minister Gholam Hossein Nozari told the official IRNA news agency.

"Some OPEC members are providing the market with excess supply and producing more than their OPEC quota. Therefore, at the next meeting the members will request a stop to the excess supply," he added.

One hundred dollars a barrel is "a minimum" for oil prices, said the Iranian minister, whose country is the world's fourth-largest crude producer. - AFP/de