Oil prices dipped to near $108 a barrel on Wednesday as the dollar continued to strengthen and attention shifted to concerns over slowing global demand for crude after Hurricane Gustav left oil installations in the Gulf of Mexico region largely undamaged.
By midday in Europe, light, sweet crude for October delivery was down $1.46 to $108.25 a barrel in electronic trading on the New York Mercantile Exchange.
On Tuesday, the contract settled at $109.71 a barrel, down $5.75 from the close of trading Friday, before the Labor Day weekend. US floor trading was closed Monday. At one point Tuesday, it fell as low as $105.46, its lowest level since April.
In London, October Brent crude fell $1.30 to $107.04 a barrel on the ICE Futures exchange.
Since oil prices reached a record $147.27 on July 11, sentiment among traders has shifted to expect slowing economic growth in the U.S., Europe and Japan will likely spread to developing countries and undermine crude demand.
"That's been a focus of the market, that the demand side has weakened, particularly in developed countries like the US," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. "Had it not been for the hurricane, we would have seen a lower price profile over the last week."
Virtually all oil and natural gas production remained shut down in the Gulf of Mexico, according to the US Minerals Management Service. It was too soon to say when output might resume, though some oil companies were preparing to redeploy evacuated personnel as early as Wednesday.
Without serious damage, oil and natural gas facilities should start up again in a day or two, while coastal refineries could take two to four days to resume production, depending on their size. In 2005, Hurricanes Katrina and Rita knocked out the region's offshore energy infrastructure for several weeks.
Also weighing on oil Wednesday was a stronger dollar versus the euro. A rising dollar encourages investors who bought oil as a hedge against inflation to sell. The euro fell to $1.4397 from $1.4518 late Tuesday in New York, while the dollar lost some ground to 108.53 Japanese yen from 108.67 yen Tuesday.
"It's certainly a factor," Moore said. "At the very least, oil has an intrinsic value, so movements in the U.S. dollar has a valuation effect on oil in dollar terms."
Investors were also waiting for a Thursday report from the US Energy Department's Energy Information Administration on US oil, gasoline and distillate stocks for the week ended Aug. 29.
The EIA said last week that crude stockpiles fell slightly by 100,000 barrels to 305.8 million barrels for the week ending August 22, while gasoline stocks dropped 1.2 million barrels.
In other Nymex trading, heating oil futures fell 2.84 cents to $3.0452 a gallon, while gasoline prices lost 4.87 cents to $2.6850 a gallon. Natural gas for October delivery shed 9.6 cents to $7.165 per 1,000 cubic feet.