Oil falls below $109 on demand, Gustav threat eases

By Matthew Robinson

LONDON (Reuters) - Oil fell below $109 a barrel on Wednesday, weighed down by slowing demand in the United States and other consuming nations and signs the U.S. oil sector would recover quickly from Hurricane Gustav.

U.S. crude traded down $1.44 to $108.27 a barrel by 8:20 a.m. EDT after settling below its 200-day moving average, a key technical level, for the first time since May 2007 on Tuesday.

London Brent crude fell $1.20 to $107.14 a barrel.

Prices have fallen by more than $7 from Friday after Hurricane Gustav proved to be less devastating than feared.

Initial checks on U.S. Gulf of Mexico energy installations showed little damage, and the Louisiana Offshore Oil Port (LOOP) -- the nation's only deepwater port -- expects to resume operations in the next couple of days.

Companies had closed 13 refineries and shut in all of the 1.3 million barrels per day (bpd) of oil production in the Gulf and 95.4 percent of the region's natural gas output.

Now the storm has passed, analysts said slowing oil demand in the United States and other consumer nations would continue to depress oil prices, which have dropped from a record of $147.27 on July 11.

DEMAND DESTRUCTION

"It's the economy, economy, economy. Everyone's worried about demand destruction," said Robert Nunan, a risk management executive at Tokyo-based Mitsubishi Corp.

Surging oil demand in emerging economies such as China and India underpinned a six-year rally in crude prices that sent prices up sevenfold at their peak.

Further strength this year came from a rush of cash from investors buying commodities as a hedge against inflation and the weak U.S. dollar. But the dollar has since rallied, hitting an 11-month high against a basket of major currencies on Wednesday.

The rapid changes on the commodities market have been bruising for some.

On Tuesday, Ospraie Management LLC said it would close down a flagship fund, although it still manages $4 billion in other investment funds.

Traders said the closure could have added to losses on commodity markets this week, but they did not expect the impact to continue.

"I don't think one hedge fund will have much impact, though it probably helped the market to come down," said Christopher Bellew of Bache Commodities, adding the market remained bearish in the short term.

"We have a strong dollar and weak hurricanes," he said.

More storms were brewing in the Atlantic but so far were not threatening the U.S. Gulf of Mexico.

Tropical Storm Hanna could strike the U.S. East Coast, while Hurricane Ike continued westward across the Atlantic and was projected to be in the vicinity of the Bahamas by Sunday.

Any disruption caused by Gustav will not be fully reflected in U.S. inventory data until next week. The latest set of data will be released on Thursday, a day later than usual because of a public holiday in the United States on Monday.

A Reuters poll of analysts forecast stockpiles of crude rose 100,000 barrels last week, a 1.3 million-barrel drawdown in gasoline supplies and a 500,000-barrel build in distillates.

(Additional reporting by Barbara Lewis in London and Chua Baizhen in Singapore; editing by James Jukwey)