Hurricane Rita, one of only three recorded Category 5 storms, weakened slightly to a Category 4 storm yesterday, but remained extremely dangerous as it bore down on Texas.
But markets reacted less to Rita than they did to Hurricane Katrina last month, as Katrina’s devastation has already caused US crude demand to tumble by nearly 30%.
Oil companies have already shut 12 Texas refineries and one in Louisiana as a precaution against Rita which is expected to hit land early this weekend, striking anywhere between Houston and the Louisiana border.
The US Minerals Management Service said Rita had already added to the proportion of offshore Gulf of Mexico production shut down, with over 91% of facilities now closed.
On Thursday US light crude weakened 30 cents on the New York Mercantile Exchange to US$66.50 per barrel, below the three-week high of US$68.27 hit the previous day. London Brent crude fell 23 cents to US$64.50 on the International Petroleum Exchange.
Last month Katrina lashed offshore oil and gas platforms and flooded New Orleans and the Louisiana refining hub, sending oil prices to a record US$70.85 per barrel. Four refineries, representing 5% of US refining capacity, are still offline.
Analysts are predicting Rita will have a bigger impact on petrol prices than on crude costs, as lost refining capacity aggravates any shortages. They are also warning of any damage to natural gas facilities as lost gas supplies will be far more difficult to replace than lost crude.
US crude stocks fell 300,000 barrels, compared to expectations for a rise of 200,000 barrels, while US petrol stocks rose by a surprise 3.4 million barrels last week, the Energy Information Agency said.
The increasing petrol stocks are another sign that surging prices are starting to curb demand.
US crude stocks are still up 12% on last year's levels, after OPEC members earlier this year sent oil to the world's biggest consumer to avert a fourth quarter shortage at a time when the production of distillates, including heating oil, peaks in preparation for the northern winter.
Oil prices surged briefly on Wednesday, with US light crude hitting US$67.69 per barrel, and London Brent crude touching US$65.41, when Rita was upgraded to a Category 5 storm.
But a US government report saying refinery output had started to recover from the devastation of after Hurricane Katrina helped keep a lid on prices.
By then oil companies, including Royal Dutch Shell, BP, Exxon Mobil and Chevron, had already evacuated hundreds of workers from offshore rigs and platforms near Texas and Louisiana.
In onshore Texas, BP and Marathon Oil shut refineries, and Valero Energy said it was reducing production at two of its refineries.
But Texan refineries, being above sea level, face a smaller risk of flooding than the below-sea level Louisiana refineries that bore the brunt of Katrina.
Tuesday saw oil fall back towards US$65 on news that OPEC was to offer all its spare production in a bid to dampen rampant prices. The cartel’s offer followed calls by European Union finance ministers, represented by Britain's Gordon Brown, for OPEC to do more to prevent high fuel costs from slowing economic growth.
US crude traded down US$2.04 to US$65.35 a barrel, after surging US$4.39 on Monday - the biggest one-day hike on record - as Rita stormed through the Bahamas. London Brent crude was down US$1.96 to US$63.65.
Unrest in other oil-producing countries also supported prices this week.
Over 100 armed militants invaded a Nigerian oil flow station operated by Chevron on Thursday, disarming security forces and forcing it to stop production, while Shell evacuated staff from its Nigerian headquarters as a precaution.
Analysts were also concerned about another upsurge of violence in Iraq and unease over Iran's nuclear programme.
