Oil: Price slides as Wilma supply threat eases

LONDON - Oil dropped more than a dollar on Tuesday as Hurricane Wilma was expected to steer clear of US rigs and refineries and the world's top banker said record prices were eroding demand.

US crude settled down US$1.16 to US$63.20 a barrel after a gain of 2.8 per cent on Monday. London Brent crude was US$1.29 lower at US$59.28 a barrel.

Wilma gained strength in the Caribbean Sea, but its path was set to veer east towards Florida and away from the heart of US oil infrastructure in the Gulf of Mexico.

"If it does turn away towards Florida it will be a non-event," said oil trader Colin Tang at investment bank Calyon in Singapore. "The market got ahead of itself on Monday." Dealers had worried that Wilma, the 21st named storm of the 2005 Atlantic season, could delay a recovery in US output ahead of peak winter heating fuel demand in the northern hemisphere.

As much as 66.4 per cent of the Gulf of Mexico region's normal 1.5 million barrels per day (bpd) production remains shut after Hurricanes Katrina and Rita. Five refineries amounting to 1.3 million bpd, or 7.7 per cent of US capacity, remain shut.

"The underlying 'tug of war' between bullish US refinery outages and product stock draws and bearish weakening demand may not be resolved for another two to four weeks," said a report by Calyon Corporate and Investment Bank.

"In the end, the bulls will win, but it will take healthy US demand to convince the markets."

Prices have fallen from a late August high above US$70 as signs emerge that high energy costs are eroding demand. But oil, in real terms, is near levels unseen in a quarter century.

US Federal Reserve Chairman Alan Greenspan handed more evidence to investors weighing the extent of oil "demand destruction." "Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," Greenspan said in a speech in Tokyo.

But he said expensive oil was encouraging Americans to become more energy efficient and cut petrol consumption.

In Asia, Jakarta is leading efforts to conserve fuel and investors are waiting to see whether China and India -- the region's bigger consumers -- follow suit.

Costlier fuel in Indonesia, courtesy of government price increases, has cut demand by a third and led the Asian country to delay petrol imports.

Signs of slower US demand have led to forecasts of lower demand growth, with producer cartel Opec revising down its 2005 outlook to 1.2 million bpd. It expects demand growth to recover to 1.5 million bpd next year.

Further direction on supplies in the world's largest consumer should come from US government data due on Wednesday.

The data were forecast to show a 1.7 million-barrel build in crude stocks but a 1.8 million drop in distillate inventories, including heating oil.

- REUTERS