Oil Falls to 5-Month Low as Gulf Production Prepares to Resume

By Mark Shenk

Sept. 2 (Bloomberg) -- Crude oil fell below $106 a barrel to a five-month low as energy companies prepared to resume output at platforms in the Gulf of Mexico closed by Hurricane Gustav.

Royal Dutch Shell Plc, Total SA and ConocoPhillips said they were inspecting Gulf platforms today. Oil, down more than $40 from its July record, dropped because Gustav inflicted less damage to states along the Gulf than occurred in 2005 when hurricanes Katrina and Rita stuck the region.

``This selloff is a direct result of the non-event that Gustav turned out to be,'' said Gene McGillian, an analyst at TFS Energy LLC in Stamford, Connecticut. ``This is the first test of the infrastructure along the Gulf since the damage in 2005. The initial signs are that damage was light and there won't be delays starting up production.''

Crude oil for October delivery fell $7.18, or 6.2 percent, to $108.28 a barrel at 10:02 a.m. on the New York Mercantile Exchange. Futures touched $105.46, the lowest since April 4. Prices are up 44 percent from a year ago.

Natural gas for October delivery tumbled 49.1 cents, or 6.2 percent, to $7.452 per million British thermal units in New York.

``This drop in prices kills the notion that we weren't in a bubble,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``The oil market won't turn around till the economy recovers.''

Aerial Survey

An aerial survey of oil and natural-gas platforms and rigs in the Gulf yesterday found no structural damage and no oil spills, the U.S. Coast Guard said. A flight this morning over the lower Mississippi River discovered some oil sheen, possibly from a partly sunken tugboat, Coast Guard Chief Petty Officer Adam Wine said today in an interview.

Shell, Europe's largest oil company, plans to send a limited number of workers to its platforms in the Gulf of Mexico today, the company said in a statement.

Louisiana refineries shut by Hurricane Gustav may take about 10 days to resume operations because of a lack of power, according to companies that include Marathon Oil Corp., Valero Energy Corp. and Exxon Mobil Corp.

Exxon Mobil shut Baton Rouge, its second-largest U.S. refinery, after Gustav's winds cut power to the Louisiana-based plant, according to an advisory on the company's Web site.

ConocoPhillips, the second-largest U.S. refiner, said its 247,000-barrel-a-day Alliance refinery in southern Louisiana sustained ``minor damage'' and a complete assessment of the refinery would be made later today, spokesman Bill Tanner said by telephone.

Gasoline for October delivery dropped 17.13 cents, or 6 percent, to $2.6829 a gallon in New York.

Evacuations

Workers from more than 70 percent of the platforms and rigs in the Gulf were evacuated as Gustav approached, according to the U.S. Minerals Management Service. All of the area's 1.3 million barrels a day of oil output and 95 percent of its gas production, or 7.06 billion cubic feet, were shut.

Oil's 28 percent slide from its July 11 record of $147.27 a barrel is a ``symptom'' of an economic slowdown in the U.S. and Europe and may continue over the next six months, investor Marc Faber said in a television interview in Bangkok.

Faber reiterated his forecast that the second half of 2008 won't be ``favorable'' for commodities.

The dollar rose to the highest level against the euro in almost seven months as oil fell and Federal Reserve rate cuts raised speculation that the U.S. economy will outperform Europe and Asia. The dollar increased 0.7 percent to $1.4516 per euro from $1.4617 yesterday. It touched $1.4467, the strongest level since Feb. 8.

Dollar and Oil

``A lower crude-oil price directly impacts the U.S. trade balance, which helps the dollar,'' said Tim Evans, an energy analyst with Citi Futures Perspective in New York. ``The dollar's rise can then feed into the drop in oil, which is the reverse of what occurred during the first half of the year.''

Brent crude oil for October settlement fell $2.47, or 2.3 percent, to $106.94 a barrel on London's ICE Futures Europe exchange.

The 13 members of the Organization of Petroleum Exporting Countries, will meet on Sept. 9 in Vienna to review production targets.

``Now the big question is how OPEC will respond to the drop in prices,'' Lynch said. ``It will probably be a battle between those who are looking for prices at $100 or $80. The Saudis will probably be happy with lower prices and they are the ones with the barrels.''

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.