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Oil prices drop as Rita weakens

Crude oil prices dropped sharply on Friday, the second consecutive day of declines, as traders welcomed news that Hurricane Rita had weakened, suggesting that damage to refinery capacity in the Gulf could be less severe than originally feared.

Refineries in the projected path of the hurricane were shuttered by Friday, including facilities operated by BP PLC, Royal Dutch Shell PLC and Exxon Mobil Corp. Nineteen of Texas' 26 refineries, with a combined daily capacity of nearly 5 million barrels, have been shut, according to the Energy Information Agency.

However, unlike refining facilities shut down by Hurricane Katrina -- four of which were still out of service Friday -- traders expected less damage from Rita because the Texas refineries were on higher ground than those in Louisiana.

Light sweet crude for November delivery fell US$2.31 to settle at US$64.19 a barrel on the New York Mercantile Exchange. Heating oil dropped nearly US$0.10 to US$1.95 a gallon, while gasoline fell more than US$0.05 to US$2.09 a gallon.

Brent crude oil futures for November lost US$2.59 to US$62.44 a barrel on London's International Petroleum Exchange (IPE), which was to remain open through Friday evening in anticipation of hectic hurricane-related trading.

IntercontinentalExchange, the owner of IPE, was to extend its oil and product trading hours over the weekend, with Brent futures markets trading from 11:15pm GMT yesterday through 9pm GMT tomorrow.

Nymex was to open electronic trading at 2pm GMT today, rather than the usual 11pm GMT, in order to accommodate traders seeking to ensure crude deliveries for future months.

Nymex crude oil prices are more than 40 percent higher than a year ago, though still below the intraday record of US$70.85 set on Aug. 30 when Katrina struck Louisiana, damaging numerous refineries and platforms and shutting down production.

The EIA said 2.2 million barrels a day of gasoline production have been shut down ahead of Rita's landfall, along with 1.2 million barrels per day of distillate production and 666,000 barrels per day of jet fuel production.

However, traders were taking a wait-and-see approach to Rita.

"It's the calm before the storm," said Phil Flynn, analyst at Alaron Trading Corp in Chicago. "There's no way of knowing just how bad things will be. Once this storm goes through, we could be through the roof or, if we're lucky, down in the basement. But my guess is that after the storm, we'll go higher."

While forecasters said the storm could slow further by the time it reaches land, analysts also said lesser winds still pose a serious threat to oil rigs and refineries. Worries remain about a direct hit on the Texas coastline, home to more than a quarter of the US' refining capacity.

The US Minerals Management Service said 634 platforms in the Gulf were unstaffed on Friday, up from 605 on Thursday. More than 99 percent of the region's oil production was blocked, while more than 72 percent of natural gas production was affected.

Traders were also monitoring news from Nigeria, the world's eighth largest oil exporter, where a separatist militia group has threatened oil installations after the government arrested its leader. Chevron Corp. has shut down two oil flow stations and Shell has evacuated workers there.

Trading continued to be affected by comments made by Saudi Arabia's foreign minister in an interview with reporters in Washington. Prince Saud al-Faisail said he would like to see the price of crude fall by about US$20 a barrel below what it is now. He added there is no shortage of oil, and that prices should stabilize at US$40 to US$45 a barrel.

Saud said a big problem with energy markets is a lack of refineries in the US and elsewhere. He noted that Saudi Arabia had sought to help build a refinery in the US with no takers. It is building two refineries in Saudi Arabia, he said.

"We are adding barrels of oil on the market," Saud said. "It has no place to go."

The refinery problem was echoed Friday by Venezuela's oil minister, who said OPEC "can do nothing more" to bring down rising oil prices, which he blamed on refining bottlenecks.
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