Oil Falls as Hurricane Gustav Weakens, Easing Damage Fears

By Grant Smith and Alexander Kwiatkowski

Sept. 1 (Bloomberg) -- Crude oil fell, reversing earlier gains, after Hurricane Gustav weakened, easing concern of widespread damage to drilling rigs and refineries.

Gustav has been downgraded to a Category 2 storm, the second-weakest of the five levels of hurricane strength, the National Hurricane Center in Miami said in its latest advisory. Preparations for the storm closed 96 percent of offshore oil production and about 10 percent of U.S. refining capacity.

``The latest forecast shows that while Gustav is perfectly aimed at the heart of U.S. oil and gas production it's not quite as strong as was initially feared,'' said Mike Wittner, Societe Generale's London-based head of oil research. ``The refining system is not as stretched this time round compared with Rita and Katrina.''

Crude oil for October delivery fell as much as $3.01, or 2.6 percent, to $112.45 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $113.19 at 2:32 p.m. London time. It earlier rose as much as 2.2 percent to $118.

Gulf Coast refineries have cut at least 1.56 million barrels a day of production, about 9.8 percent of the U.S. total. Gustav, packing winds of 115 miles an hour (240 kilometers an hour) was 85 miles south of New Orleans at 6 a.m. Miami time, according to the National Hurricane Center.

Still, Gustav is two categories below the peak strength reached by Hurricane Katrina, which sent oil prices to records after wrecking refineries around New Orleans three years ago. 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.

Workers Evacuated

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 on its Web site yesterday. 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.

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.

Nymex electronic trading opened early today 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.

Brent crude oil for October settlement was down $2.46, or 2.2 percent at $111.59 barrel on the ICE Futures Europe Exchange.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net