Oil prices edge lower

Crude futures dip as the dollar strengthens and traders wait to see how much damage Gustav caused to facilities in the Gulf of Mexico.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices extended their decline Wednesday, to a nearly 5-month low, as the dollar strengthened against major currencies and traders waited for Gustav damage reports.

The crude futures contract for October delivery fell 36 cents to settle at $109.35 a barrel, the lowest close since the $109.09 finish on April 7. Oil had traded as low as $107.22 and hovered around $108 for most of the session.

On Tuesday, oil prices fell $5.75 a barrel to settle at $109.71.

Oil prices have fallen sharply from the record high price of $147.27 a barrel, set July 11, as a sagging U.S. economy has cut into energy demand.

Stronger dollar: Crude oil is traded in dollars around the globe, so a stronger dollar pushes the price lower, said Tom Orr, director of research at Weeden & Co., a financial services firm.

The dollar reached a 7-month high against the euro on Wednesday. "When we had an incredibly structurally weak dollar, people went to the commodity trade," said Orr, as "a hedge against inflation, as a place to park money."

But now that the dollar has started to recover, investors are looking to other, more profitable places to keep their funds, Orr said.

Slumping demand: Because Gustav did not hit with as much force as anticipated, and the damage to oil production facilities appeared to be less than was feared, the oil market returned its focus to slumping global demand for energy.

"The market is starting to realize that demand for oil is much weaker today than it was a year ago," said Phil Flynn, senior market analyst at Alaron Trading.

Because demand for oil has fallen off since last year as the economy has suffered, Flynn said the supply disruption that Gustav caused has not been as massive a concern as when Hurricane Katrina hit the Gulf region in 2005.

Gustav: In advance of Monday's storm, oil companies shut down 100% of production facilities in the Gulf. Those facilities remain shut down, according to a report released Wednesday by the U.S. Department of Energy. Oil companies were beginning to send workers out to the offshore infrastructure, but machines will not be fully operable until safety standards are met.

In addition, capacity at 23 refineries was still either shut down or reduced and 95.4% of natural gas production was still shut down, according to the U.S. Department of Energy damage update on Wednesday.

"There is still a lot of focus on Gustav and what has or hasn't happened" to production rigs and refineries in the Gulf region, said Andrew Lebow, an energy analyst at MF Global in New York.

Another analyst, however, disagreed. According to Orr, as soon as initial reports showed that Gustav did not do major damage to production rigs and refineries, oil traders stopped focusing on the storm.

While there have not been reports of major structural damage, analysts were concerned about power getting back to refineries. "It is becoming more and more apparent as we have been talking about it that some of this refinery capacity is not coming up so quickly because of power issues," said Lebow.

Flynn also said that it takes a while to get refineries back up and running. "Turning the refineries on isn't like flipping a switch - it takes time to bring them back online."

Production facilities in the Gulf will remain shut until there has been a full inspection of rigs and refineries to determine the level of damage, according to a report by the U.S. Department of Interior's Mineral Management Service agency.

SPR: Late Tuesday, the Department of Energy decided to loan 250,000 barrels of oil from the Strategic Petroleum Reserve to Citgo's Lake Charles, La., refinery, according to a statement from the government. The reserve is an emergency repository of 700 million barrels of oil that the government controls.

"Demand for oil is 1.2 million barrels a day less than it was a year ago, so a release from the SPR can very easily make up for the lost supply," said Flynn.

Hurricane Gustav closed Louisiana's Calcasieu channel which disrupted Citgo crude oil supplies, according to the government's statement.

Storms: Three other tropical storms - Hanna, Ike and Josephine - have formed in the Atlantic, but currently are not expected to track toward the Gulf of Mexico.

"Of course there are a couple of other storms out there and the market is looking at those as well," said Lebow. "It was advertised as an active hurricane season and it has been."

Tropical Storm Hanna was near Haiti on Wednesday morning and could become a hurricane by Thursday, according to the a public advisory by the National Hurricane Center. The east coast of Florida could start seeing rain from Hanna as early as Friday, according to the advisory.

-- CNNMoney.com's David Goldman contributed to this report.  To top of page

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