Oil price falls as Hurricane Gustav weakens

A stronger dollar also helped reverse the course for oil prices, which had risen by nearly $3 to over $118 a barrel earlier in the session.

Still, precautions due to Gustav prompted companies to shut down drilling and refining operations in the Gulf Coast region.

By late afternoon in Europe, light, sweet crude for October delivery was down $4.70 to $110.76 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it had reached a high of $118.25 before retreating.

On Friday, the contract fell 13 cents to settle at $115.46 a barrel.

In London, October Brent crude was down $4.32 to $109.73 a barrel on the ICE Futures exchange. U.S. trading was closed Monday for Labor Day.

"There's no question the drilling platforms in the Gulf of Mexico and the big refineries between Houston and New Orleans are in the path of this hurricane," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "There's likely to be some damage. We could see an extended period of disruption."

Some analysts, however, said the market's response to Gustav was not as strong as some predicted. U.S. energy risk management firm Cameron Hanover described reaction as "extremely subdued."

Gustav has caused the closure of shipping lanes, ports, terminals, refineries and majority of the Gulf of Mexico hydrocarbon production platforms, making it the worst storm since Rita and Katrina in 2005.

The Gulf of Mexico oil industry has shut off around 1.3m barrels of oil and 6bn cu ft of gas in daily production and 2.2m barrels of daily refinery capacity as Gustav passed through the US’ main oil producing region. There are fears that insured losses could be as high as $7bn just from damage to the offshore sector alone, and there will be much more from onshore damage.

Gustav has forced operators to close ports, including New Orleans, tanker loading terminal Loop off Louisiana, shipping lanes to ports in Texas and coastal refineries, while oil companies shut down more than 700 platforms and 86 rigs, according to the US government’s Minerals Management Service

Gustav reached the southwest Louisiana coast as a category 2 hurricane, less devastating as anticipated, but with enough power to bring down power lines.

Shipping channels leading to Lake Charles in Louisiana as well as Houston, Beaumont and Port Arthur in Texas have been closed, while several refineries in the area, owned by oil firms ExxonMobil, Marathon, Valero and ConocoPhillips, also halted operations.

Fabrication yards including those in Morgan City were closed as engineering firms hoped their construction work would not be damaged by the storm and owners of the Sabine Pipeline and Henry Hub gas delivery point have closed these facilities.