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Oil's fall reflects traders' views that the Gulf of Mexico platforms have escaped Gustav's wrath.
Larry Lee Photography
Oil's fall reflects traders' views that the Gulf of Mexico platforms have escaped Gustav's wrath.

Oil price drops nearly 10 per cent

Oil prices hit a five-month low as Hurricane Gustav proved much less damaging to US oil facilities than feared.

Oil prices plunged by almost 10 per cent yesterday, hitting a five-month low near US$100 a barrel as Hurricane Gustav proved much less damaging to US oil facilities than initially feared. The drop extends a negative trend in the global oil market - driven by an exodus of hot money from the commodity as the dollar rebounded - since the price hit a record high above $147 a barrel in July.

"The storm was not that bad," said Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi. "The damage wasn't very bad, no rigs were hurt." West Texas Intermediate crude for October delivery fell to a low of $105.46, a price not seen since April 8, before settling at $109.43, down $6.03. US stock markets rallied on the news, with the Dow Jones Industrial Average gaining more than 200 points.

The fall reflected confidence among traders that US offshore platforms and coastal refineries had not been seriously damaged by Gustav, which swept into the Gulf of Mexico last week and pounded the Louisiana coast with winds above 170 kilometres per hour. Concern over the hurricane was the latest in a series of events - including a pipeline fire in Turkey and the war between Russia and Georgia - that have slowed, but not stopped, a gradual decline in oil prices led by fears of falling demand, said David Fyfe, the head of the oil markets division at the International Energy Agency (IEA).

"I think the market is focusing in the background on relatively weak economic news," he said. "We got a bit of a spike on several supply issues." The fall in prices also marked a reversal of a sharp increase in oil prices in April associated with a fall in the value of the US dollar, an inflow of speculative investment, concerns about surging Asian demand and a belief that the US, Iran and Israel were on the brink of an armed confrontation over Iran's nuclear programme. Prices reached a record $147.27 on July 11.

Concerns about another war in the Middle East have eased and traders are now focused on falling demand, analysts said. The IEA said demand for oil products in the US fell by 700,000 barrels in the third quarter compared to last year, as the economy slowed and motorists drove less. The spotlight has turned to concerns among some exporters that the oil price may fall too far, too fast. Gholamhossein Nozari, the Iranian oil minister, said yesterday that Opec should move to control what he saw as an excess of oil supplies on the market when it meets next week in Vienna.

"Oil supply must be well proportioned with demand, and control over Opec's excess oil supply is an issue that must be discussed at the organisation's upcoming meeting," Mr Nozari said, according to the Iranian state news agency, Irna. Mr Garis said the market was now in a "downward bias" that began in late July, with each small piece of positive news about supplies pushing prices down further. "There's a definite downward pressure: if this had happened two or three months ago, the price would have gone to $170," he said, referring to concerns over the hurricane.

"Now it's going to take some big news to push prices back up," he added. Mr Garis attributed the bearish sentiment of traders to a build-up of surplus capacity in oil markets. Falling demand in industrialised nations could open up a spare capacity of four to 4.5 million barrels of oil daily, which would be available in the event of a sudden disruption to supplies, he said. In its July oil market report, the IEA predicted surplus capacity would increase to about four million barrels per day in the next several years, coinciding with a slowdown in the world economy.

Mr Fyfe cautioned, however, that four million barrels amounted to very little in a market consuming close to 87 million barrels daily. "Four million barrels per day... is still a pretty slim margin of flexibility," he said. "There are a lot of risks." cstanton@thenational.ae

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