Oil: Prices slide as storm Chris weakens

NEW YORK - Oil prices fell sharply on Friday after forecasters downgraded Tropical Storm Chris to a depression, easing worries the tempest would damage oil and gas production platforms in the Gulf of Mexico.

US crude oil futures fell US$1.11 to US$74.35 a barrel while London Brent crude shed 73 cents to US$75.83.

The National Hurricane Center said Chris, the third named storm of the 2006 Atlantic Hurricane Season, weakened in the Caribbean as it lumbered toward the Gulf of Mexico, home to a quarter of US oil production.

Oil traders said the downgrade triggered selling in the oil markets, which had been pumped up earlier in the week on expectations the storm would slash US oil output.

Energy companies operating in the region, still recovering from last year's record hurricane season, said Friday they were bracing for a possible restrengthening of Chris once it hits the Gulf's warmer waters next week.

"We're still monitoring it, and we can react very quickly, if we need to. We're approaching this storm with lessons learned from last year," said Neil Chapman, spokesman for oil giant BP.

Last year's hurricanes temporarily knocked out a quarter of US crude and fuel production, toppling offshore platforms, destroying undersea pipelines, flooding coastal refineries, and sending energy prices to record highs.

"What's clear is that whatever happens to Chris, it's a reminder of the market's sensitivity to hurricanes," said Eoin O'Callaghan of BNP Paribas.

As of June, about 12 per cent of the Gulf of Mexico's 1.5 million bpd of crude oil production remained shut from the record 2005 storm season, along with 9 per cent of the region's 10 bcfd natural gas production.

US slowdown

Adding pressure to prices, the number of US jobs grew by 113,000 in July, less than analyst forecasts, and the unemployment rate rose to 4.8 per cent, the highest level since February.

"The US slowdown story is going to become more and more compelling for oil markets," said O'Callaghan.

US data a week ago showed the US economy grew at an annualised rate of 2.5 per cent in the second quarter, well below analysts' forecasts.

But prices remain within reach of the record high, driven by strong demand and geopolitical turmoil.

Crude supply disruptions have occurred in Iraq, where sabotage halted the recovery of exports from the north of the country, and in Nigeria, where at least 718,000 barrels per day of crude has been shut in, mostly because of militant unrest.

Supplies of North Sea benchmark grades have also fallen to a record low because of heavy field maintenance, which helped to explain the unusual premium of Brent futures over US light sweet crude.

Apart from in Iraq, the risk of supply disruption in the Middle East is for now theoretical.

Israel's war against Hizbollah guerrillas in Lebanon has raised concerns among analysts that the dispute between the West and oil producer Iran over its nuclear programme could become more difficult to solve.

Iran funded and armed Hizbollah in the 1980s, but says its support now is only moral and political.

France and the United States were expected to hold more talks on a draft UN resolution aimed at ending the fighting in Lebanon.

(Additional reporting by Barbara Lewis in London)

- REUTERS