Oil Plummets, Creeps Below $64/Barrel

Finally some respite in those burgeoning oil prices breaking the back of monthly budgets. Crude oil prices slid more than $2 a barrel Tuesday in a sign that market jitters may be easing somewhat because the summer driving season is over and the winter heating season has yet to begin, analysts said.

Light sweet crude for November delivery fell $2.27 to $63.20 in afternoon trade on the New York Mercantile Exchange. Gasoline futures fell more than 7 cents to $1.99 a gallon, while heating oil futures fell more than 7 cents to $2.00 per gallon.

Natural gas for November delivery fell 4.7 cents to $13.97 per 1,000 cubic feet.

But analysts said the falls were overdone as the market was still facing a serious supply crunch, with about a fifth of US refining capacity still shut down in the aftermath of hurricanes Katrina and Rita.

At 16.55 pm, November-dated Brent futures contracts were down 213 cents at 60.67 usd a barrel while US benchmark November-dated contracts were down 217 cents at 63.30 usd.

Paul Hornsell, head of energy research at Barclays Capital, said that with crude prices lower now than they were before Katrina hit, the falls were clearly unjustified.

"It's getting to levels where we start thinking this is too much of an over-reaction to the bearish view that there is going to be demand destruction. We just don't see the evidence for that.

"The reality is supply destruction. Overall there's still a big crunch on supply side. This is just speculative money pushing too far to the short side and it should rebound," he said.

US Energy Secretary Samual Bodman told CNBC television that Gulf of Mexico oil refineries will need between two and four weeks to get back to normal after Hurricanes Katrina and Rita.

The energy secretary is widely believed to have sparked the fall in crude yesterday after he said the US government was "prepared to do what is necessary with strategic reserves".

But Hornsell pointed out that the US only has 2 mln barrels of heating oil in its strategic reserves and that "releasing more crude in a market that doesn't want more crude is not a great threat (to prices)".

"What Bodman really wants to control is gasoline and diesel retail prices, and it's difficult to do that with lots of crude and too few barrels of heating oil," he said.

The US Minerals Management Service said 92.8 pct of crude oil production in the Gulf of Mexico was still shut down in the aftermath of Hurricanes Katrina and Rita as of Monday.

In other market-related news, Mexico's gulf coast is bracing itself for a direct hit later today by Hurricane Stan, which earlier caused 39 deaths in Central America while still a tropical storm.

Stan strengthened to a hurricane overnight as it swirled over the Gulf of Mexico's Bay of Campeche, whose oil fields account for about two-thirds of Mexico's crude output.

The hurricane was expected to slam ashore near Punta Zapotitlan in the state of Veracruz around noon (1700 GMT), according to Mexico's meteorological service.