Oil, Gas Fall as Gulf Hurricane Weakens, Easing Damage Concern

By Margot Habiby

Sept. 1 (Bloomberg) -- Crude oil fell to the lowest in more than four months and natural gas dropped to a low for the year after Hurricane Gustav made landfall as a weaker-than-expected storm, easing concern of major damage to rigs and refineries.

Oil companies halted 96 percent of offshore oil production and about 10 percent of U.S. refining capacity in preparation for Gustav, which was downgraded to a Category 2 hurricane, the second-weakest category, before coming ashore in Louisiana.

``The reason that the energy markets are so soft today is because where the hurricane came ashore basically misses everything,'' said Michael Rose, trading director at Angus Jackson Inc. in Fort Lauderdale, Florida. ``There are a couple of rigs out there, but not many. The market is just basically resuming its trend, which was lower.''

Crude oil for October delivery fell $4.28, or 3.7 percent, to $111.18 a barrel at 4:13 p.m. in electronic trading on the New York Mercantile Exchange. It has traded as high as $118 a barrel and as low as $110.60 a barrel since the electronic session began at 2:30 p.m. yesterday. Oil is 20 percent below the record of $147.27 a barrel reached July 11.

Natural gas for October delivery fell 43.3 cents, or 5.5 percent, to $7.51 per million British thermal units, while October gasoline fell 10.42 cents, or 3.7 percent, to $2.75 a gallon on the Nymex.

``What we are seeing is just a continuing downward trend in the oil price,'' said Simon Wardell, energy research manager at Global Insight Inc. in London. ``With demand weakening and supply increasing, save obviously for the disruption we're getting now, the trend is very much going to be continuing the move downwards.''

Brent Crude

Brent crude oil for October settlement fell $4.64, or 4.1 percent, to settle at $109.41 barrel at 1:46 p.m. New York time on the ICE Futures Europe Exchange.

Gulf Coast refineries have cut at least 1.56 million barrels a day of production, about 9.8 percent of the U.S. total. Exxon Mobil Corp. reduced operating rates at its three plants including Baton Rouge, while Royal Dutch Shell Plc plans to close its Capline crude oil pipeline system as supplies from fields shut by the storm dwindle.

Gustav, packing winds of 90 miles an hour (145 kilometers an hour), was northeast of Franklin, Louisiana, at 2 p.m. New Orleans time, according to the National Hurricane Center in Miami. The storm has weakened further to Category 1.

The storm was weaker than Hurricane Katrina three years ago, which sent oil prices to records after wrecking refineries around New Orleans. Katrina's intensity was greatest over the Gulf, where it damaged rigs, platforms and undersea oil and gas pipelines. It then weakened to a Category 3 hurricane before reaching land.

`Too Much' Premium

``Last week, we had a little too much storm premium pushed into the market by smaller-type speculators who thought it would be a big deal,'' said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. Traders ``forced a huge amount of storm premium out of the market when it was downgraded to a Category 2 storm, and it looks like the supply we're going to lose can easily be replaced.''

Louisiana today asked the federal government to release fuel from the Strategic Petroleum Reserve to alleviate disruptions from Gustav.

Workers from more than 70 percent of the platforms and rigs in the Gulf have been evacuated as Gustav approaches, the U.S. Minerals Management Service said in a statement. About 1.25 million barrels a day of oil and 6.09 billion cubic feet of gas have been shut, or more than 96 percent of offshore oil output and 82 percent of gas production.

Weaker Storm

``The hurricane was not like some of the others,'' because it was weaker, said Dennis Smith, a spokesman for Nabors Industries Ltd., which operates hundreds of onshore and offshore drillings rigs. Smith said the company was ``unlikely'' to sustain much damage, though a fuller assessment won't be available for another two days.

The Gulf of Mexico normally produces about 1.3 million barrels of oil and an estimated 7.4 billion cubic feet of gas a day, according to the Minerals Management Service, part of the U.S. Interior Department.

Two more storms are further out in the Atlantic. Hanna, which today became the fourth hurricane of the season, is near the Bahamas and is expected to move along the east coast of Florida later this week and reach land in Georgia or South Carolina. Tropical Depression Nine formed today, halfway between Africa and the Leeward Islands, and could become a tropical storm later today.

Nymex electronic trading opened early to allow traders to respond to Gustav. Trades will be recorded as part of the Sept. 2 session because of today's U.S. Labor Day holiday.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

Last Updated: September 1, 2008 16:39 EDT

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