Oil falls below $66 on hopes Rita misses refineries

Oil fell below $66 a barrel and gasoline prices slid yesterday as Hurricane Rita lost some intensity, while its direction may avert a direct hit on the heart of the Texas refining hub near Houston.

But with almost 30 per cent of US refining capacity shut down across the Gulf Coast and gasoline inventories already running low, many dealers took a cautious approach, waiting to see whether Rita wreaks as much havoc as last month's Katrina.

US light crude was down 86 cents to $65.64 a barrel, extending overnight losses of 30 cents. London Brent crude fell 78 cents to $63.82 a barrel.

The storm, still a Category 4 and equivalent in ferocity to Hurricane Katrina, is expected to hit the upper Texas and south-west Louisiana coast, just to the east of main production and population centres in Galveston, Houston and Corpus Christie, today.

Estimated windspeeds have eased to 225 kph from 280 kph over the past day.

"The market is now taking a pause to assess just what Rita will do," said Jarrod Kerr, economist at JP Morgan in Sydney. "It won't fully digest Rita until Monday, although the forecasts are looking a little better than yesterday at present.

"There's plenty of oil out there drums-wise, the problem remains converting that into product, with more damage no doubt translating into a negative for the global consumer," he added.

Gasoline futures, which surged on Thursday, led the early retreat, falling 2.58 per cent or 5.54 cents, to $2.0840 a gallon. Heating oil was off 4.28 cents to $2.003 a gallon.

Oil traders said the upside for prices was limited by the possibility that members of the International Energy Agency (IEA) could extend their post-Katrina emergency oil reserve release, which includes refined fuels such as gasoline and diesel. The US Department of Energy is ready to loan oil from its Strategic Petroleum Reserve (SPR) as it did after Katrina but it has little resource to deal with a shortfall in refined products.

"If there is a supply disruption, which there is a good chance there will be, they may not hesitate to release the SPR and we already have crude oil and products coming from Europe after Katrina," said John Brady, broker at ABN AMRO in New York.  

In addition to four refineries still out of action after Katrina, 13 Texan and two Louisiana plants have been closed as a precaution against Rita. Four others have reduced operations.

Exxon Mobil Corp. announced the closure of the country's largest refinery at Baytown, Texas and its Beaumont facility, the two disabling more than 900,000 barrels per day (bpd) alone.

Rita's onslaught has brought to a halt recovery efforts after Katrina churned through the Gulf of Mexico in late August, damaging oil and gas platforms, flooding the Louisiana refining centre and sending crude prices to a record $70.85 a barrel.

Almost 92 per cent of offshore oil output, or 1.379 million bpd, is out of action in the Gulf of Mexico, the US Minerals Management Service said. Almost 66 per cent of gas output, or 6.594 billion cubic feet, is also down.

But with US crude supplies almost 12 per cent above last year's levels, most concern is focussed on sky-high gasoline prices and heating oil as the US winter approaches.

Analysts warned that any damage to natural gas facilities could boost prices because reduced supplies would be far more difficult to replace than lost crude and could spur additional demand for heating oil and utility fuel oil.

The threat of further supply outages also hung over Nigeria, where more than 100 armed militants stormed an oil platform on Thursday, shutting down only a small volume of output but raising the spectre of further disruptions from local groups.