Oil Prices Slightly Lower on Stronger Dollar

Oil prices inched lower Wednesday as a stronger dollar and slowing demand for crude overshadowed an almost total shutdown of energy output in the Gulf of Mexico after the passage of Hurricane Gustav.

Preston Armond fills gas cans at a station in Slidell, La., Tuesday, Sept. 2, 2008. Armond had evacuated Slidell and had returned to reopen his business. (AP Photo/Eric Gay)

(AP)

Light, sweet crude for October delivery fell 36 cents to settle at $109.35 a barrel on the New York Mercantile Exchange, after earlier dipping as low as $107.22.

At the pump, a gallon of regular fell to a new national average of $3.681. That's less than half a penny lower than Tuesday's average and more than 10 percent off the all-time record of $4.114 set July 17.

On Wednesday, about 96 percent of oil production in the Gulf and about 92 percent of natural gas output remained shut down after Gustav, according to the U.S. Minerals Management Service, as energy firms assessed platforms, rigs and pipelines and worked to redeploy evacuated workers. The Gulf area is home to a quarter of U.S. oil production and 40 percent of refining capacity. Some oil companies in the western Gulf whose equipment wasn't in the path of the storm began ramping up operations Wednesday.

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Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago, said crude's inability to rally on the shutdown highlights the bearish sentiment that has gripped energy markets in recent weeks.

"People are starting to realize that if we can't rally oil with a 100 percent shutdown then this oil run is probably done," Flynn said.

Crude has dropped about $40, or 26 percent, since surging to a record $147.27 a barrel on July 11, weighed down as a U.S. economic slowdown spreads overseas and curbs demand for petroleum products.

"That's been a focus of the market, that the demand side has weakened, particularly in developed countries like the U.S.," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. "Had it not been for the hurricane, we would have seen a lower price profile over the last week."

On Tuesday, crude plunged in a dramatic sell-off after it became clear that Gustav had left the U.S. oil infrastructure without the massive damage doled out by Hurricanes Katrina and Rita three years ago. Prices settled at $109.71 a barrel, down $5.75 from the close of trading Friday, before the Labor Day weekend; U.S. floor trading was closed Monday.