Oil plunged more than $4 on Monday as concerns that Hurricane Gustav would cause severe damage to the US oil sector eased after the storm weakened before hitting the Louisiana coast. Gustav - which forced more than a quarter of the United States' refining capacity to shut down or cut processing rates - weakened to a Category 2 storm before roaring ashore near Port Fourchon, Louisiana.
A key logistical port that supports 75 percent of Gulf of Mexico drilling operations. US crude fell $4.24 in electronic trading to $111.22 a barrel by 1905 GMT as markets discounted the potential damage from the storm, which had earlier been forecast to hit the United States as a Category 4 storm.
London Brent crude settled down $4.64 at $109.41 a barrel. "It looks like Gustav is not going to be as strong a storm as the market had feared," said Phil Flynn of Alaron Trading in Chicago. "There is a belief that this storm is not going to do much damage, that we are going to be able to get through this and not miss a beat and continue our downward move." All of the 1.3 million barrels per day of oil production capacity in the US Gulf of Mexico was shut as of Monday morning, according to the US government.
The Louisiana Offshore Oil Port, the only US port capable of offloading the biggest oil tankers, halted all operations. Gustav is the biggest threat to the region - home to a quarter of US oil output and 15 percent of natural gas output - since hurricanes Katrina and Rita wrecked more than 100 offshore oil platforms in 2005 and closed several large refineries for months. Nearly 2 million people fled the Louisiana coast and more than 11 million residents in five US states were threatened by the storm.
The NYMEX declared force majeure on all delivery obligations under its August and September natural gas futures after ports and the Henry Hub delivery point were shuttered. Oil prices have tumbled from record highs above $147 a barrel struck in July as high fuel prices and wider economic problems hit demand in the United States and Europe. Iran has insisted that oil markets are oversupplied, and the Opec nation's oil minister said Sunday that $100 a barrel was the lowest acceptable price for crude.
Opec meets in Vienna on September 9 to discuss output policy, but other member nations have backed Iran so far. Venezuela and Ecuador said on Friday they expect the oil exporters' group to maintain current output levels. The group increased oil supply for a fourth consecutive month in August, mainly due to higher output from Iran and smaller hikes from Nigeria and Angola, a Reuters survey showed.
Traders are also eyeing tensions between Russia and the West, after Kremlin leader Dmitry Medvedev said Sunday that Russia does not want a confrontation with the West but will hit back if attacked. The European Union will warn Russia on Monday that Moscow's future ties with the bloc could depend on its adhering fully to a peace deal to end the Georgia conflict, according to a draft statement obtained by Reuters at a summit in Brussels.