3 Sep 2008

Oil price drops as Hurricane Gustav fades

6:31 pm on 3 September 2008

Oil prices fell $US6.60 a barrel on Tuesday, the biggest drop in dollar terms since 1991, as dealers bet the US oil industry would recovery quickly from Hurricane Gustav.

US crude fell to $US108.86 a barrel by 1630 GMT, bringing prices down nearly $US40 from the peak in mid-July amid accumulating concerns over slowing global energy demand. London Brent fell $US1.70 to $US107.71.

The drop, calculated against last Friday's settlement due to the US holiday on Monday, was the biggest in dollar terms since the start of the first Gulf War in 1991 and the biggest in percentage terms since 2004.

The easing fears that the storm would mirror Hurricanes Katrina and Rita in 2005, which caused a prolonged disruption to energy supplies in the world's biggest consumer, allowed the market to refocus on weak bearish factors like slowing world energy demand, rising stockpiles and a rising US dollar.

Oil and other commodities have been in a tailspin since mid-July that analysts said has been fueled by softening world energy demand and a rebound in the dollar, which weakens the purchasing power of buyers using other currencies.

Oil traders had initially expected Hurricane Gustav would stem oil's decline by interrupting supplies.

Virtually all energy production in the Gulf of Mexico, which accounts for a quarter of the nation's oil output, and about a third of US oil refining capacity was either shut or slowed down in the wake of the storm.

But early indications revealed no major damage, a signal that production could rebound quickly.