Gustav hit with less force than initially feared, but market watchers wait to assess exactly how much damage was done to oil production rigs, refineries.
NEW YORK (CNNMoney.com) — Oil futures tumbled more than $7 a barrel on Tuesday after Hurricane Gustav hit the Gulf region with less force and apparently less damage than initially feared. Prices were also pulled lower by a strengthening dollar and a return to concerns that an economic slowdown has crippled demand for energy.
U.S. crude futures for October delivery dropped $7.58 a barrel to $107.88 at 8:52 a.m. ET.
Earlier Tuesday, oil prices had plunged nearly $10 from Friday’s settlement of $115.46 a barrel. The New York Mercantile Exchange was closed for Labor Day, but held a special electronic trading session on Sunday afternoon, when crude settled $1.24 higher to $116.70 a barrel.
Adding further pressure was the U.S. dollar, which climbed against most major currencies early Tuesday. Because crude is traded in the U.S. currency around the world, a stronger dollar puts downward pressure on oil prices. When the dollar gains, it costs foreign investors more to purchase the same amount of energy, explained Neal Dingmann, senior energy analyst at Dahlman Rose & Co.
Oil prices have plummeted from a record high of $147.27 a barrel, set on July 11, as demand for pricey energy slackened in a struggling economy. “Now that (Gustav) is out of the way, there are more storms to talk about” said Dingmann, “but at least for the next 3 or 4 days, the health of the economy has come to the forefront.”
Asess damage: While it appears that Gustav did not do major damage to the energy infrastructure in the Gulf – home to 25% of U.S. oil production and 56% of imports – the complete story of the aftermath is not yet known.
Oil prices have come off sharply on reports that Gustav was not as bad as expected because “people were sort of bracing for the worst,” said Dingmann. “Early assessment that I have heard this morning is that some (production equipment) could be back on line as early as this evening.”
Other analysts were more skeptical. “Though I sure hope that the production region dodged a bullet – as many market players have been saying – I think this mindset may be a bit premature,” said Jim Rouiller, senior energy meteorologist at Planalytics, a firm that predicts how weather will impact businesses.
“It will take some time for all the oil and gas companies to send people out for damage assessment,” said Rouiller. “Many times before, this was the initial mindset only to be followed by bad news, discovery of damage.”
Gustav was a Category 2 hurricane when it touched land on Monday and has since been downgraded to tropical depression status. Its heavy rain and strong winds threatened oil refineries, according to Rouiller.
Production suspended: Oil production, natural gas production and refineries were suspended as Gustav approached the Gulf Region. According to a U.S. Department of Energy report issued Monday, 96.2% of crude oil production was shut down in the Gulf of Mexico. The shut down of oil production suspended 1.25 million barrels of crude per day.
In addition, 12 refineries in the Gulf region out of a total of 32 had been shut down on Monday, according to the report. Another 10 refineries had been moved to reduced activity. In advance of Gustav’s movement into the Gulf Coast region, 82.2% of natural gas facilities had been shut down.
Even as fears of Gustav settled, Hurricane Hanna was brewing, moving over the Turks and Caicos Islands. The National Hurricane Center predicts Hanna could make landfall as a major hurricane somewhere on the southeastern U.S. coast by Friday evening.
“The US remains under a heightened threat from storm impacts unlike the past few years – it is a whole different ball game this year,” said Rouiller. “Gustav and Fay were just a beginning