Oil: Prices fall sharply as storm fears ease

NEW YORK - Oil prices fell sharply on Friday, paring back Thursday's 3 per cent rally as the season's first tropical storm caused only minor production outages in the offshore Gulf of Mexico.

Tropical Storm Arlene forced oil companies to shut about 120,000 barrels per day of their production in the energy-rich region by Friday afternoon, amounting to about 7 per cent of the region's output - and experts said operations would be quick to restart.

"The storm may become a hurricane, but I don't think there will be any sustained damage," said Marshall Steeves, an analyst at Refco. "It's not Ivan," he added, referring to the hurricane that severely disrupted oil and gas production in the Gulf of Mexico last year.

US light sweet crude settled 74 cents lower at $53.54 a barrel on the New York Mercantile Exchange, cutting into Thursday's gain of nearly $2. London Brent crude fell $1.15 to $52.67 a barrel on the International Petroleum Exchange.

Chevron, ExxonMobil and several other oil companies said Friday they were shutting some of their oil and gas production ahead of Arlene. Hundreds of offshore oil workers have been evacuated.

But oil companies said they did not expect the storm to inflict lasting damage on operations in the region, which accounts for about 25 per cent of US oil and gas production. Arlene was expected to make landfall on the Gulf Coast on Saturday.

Last year's Hurricane Ivan was one of the most devastating to the US oil industry, shutting in about 45 million barrels of oil production over five months, damaging platforms and causing undersea mudslides that destroyed pipelines.

Crude prices were also pressured by the latest oil market report from the International Energy Agency, which showed slower demand growth in China than previous outlooks. China's explosive demand growth in 2004 helped drive last year's the oil price spike.

"The numbers continue to paint a picture of relatively strong demand, but their words make me feel that the market is heading for a fall," said Deborah White, senior economist at SG Commodities in Paris.

The IEA now sees 2005 China growth of 460,000 barrels a day to 6.89 million bpd, up 7.1 per cent from 2004. That is down 10,000 bpd from last month's forecast and off from last year's growth of 860,000 bpd, or 15.4 per cent.

However, the agency left its forecast for 2005 global demand growth little changed at 1.78 million bpd, or 2.2 per cent, saying world demand was still supported by strength in the United States and developed Asian economies.

The IEA also revised upward its prediction for demand for crude from the Organisation of Petroleum Exporting Countries, including from Iraq, for the fourth quarter to 29.6 million bpd, an upward revision of 300,000 bpd.

Opec meets next week in Vienna to consider production policy for the second half of the year.

Ministers have said Opec could decide next week on a real increase in oil output, going further in efforts to ease prices than just formalizing production already above its official ceiling of 27.5 million bpd for the 10 members that have a production quota. Iraq does not have a quota.

The cartel has been pumping at the highest level in 25 years, led by increased output from Saudi Arabia.

- REUTERS