LONDON (Dow Jones)--Crude oil futures were lower in London Monday morning as Atlantic Hurricane Dean's path looked on course to miss the concentration of U.S. oil facilities in the Gulf of Mexico.
But the threat to Mexican offshore rigs and a recovery for global equity markets has offered support and should help prevent further losses, traders said. "We are seeing people unwind precautionary positions because for now it looks as if U.S. infrastructure is going to miss the worst of the hurricane," said a broker in London. "But I think it's too early in Dean's progress to get to comfortable."
At 1122 GMT, the front-month October Brent contract on London's ICE futures exchange was down 29 cents at $70.16 a barrel. The front-month September contract on the New York Mercantile Exchange was trading $0.65 lower at $71.36 a barrel having fallen by as much as a dollar earlier.
ICE's gasoil contract for September delivery was down $4.50 at $622.50 a metric ton, while Nymex RBOB gasoline for September delivery was down 663 points at 197.25 cents a gallon.
Hurricane Dean, the first hurricane of the Atlantic storm season, is expected to be upgraded to a category 5 hurricane - the strongest level - after moving away from Jamaica and heading for Mexico's Yucatan peninsula, according to the National Hurricane Center.
Investors were said to have bought oil futures Friday, concerned Dean may end up hitting U.S. facilities further north on- and offshore Texas and beyond. The forecasts had prompted oil companies to take preventative action and were enough to shut-in an estimated 10,300 barrels of oil a day, or 0.8% of the Gulf of Mexico's total oil production by Saturday, according to the U.S. Minerals Management Service.
"Oil companies have evacuated oil facilities, which might be in the way of hurricane Dean and refineries have reduced operating," said Peter Fertig, an analyst at Dresdner Kleinwort in Frankfurt. "However, Dean moved more south and is unlikely to hit the oil facilities." But there is plenty of Mexican oil production at risk given the current projected path including the Cantarell and KMZ fields.
After leaving the Yucatan Peninsula the Hurricane is expected to emerge in the waters of the Bay of Campeche but Olivier Jakob, head of Petromatrix in Switzerland, said it should then be reduced to category one "which should not be a major challenge to oil platforms and floating production assets."
Even if Dean fails to cause significant damage to oil production in the region, analysts at Goldman Sachs believe the U.S. refining system remains vulnerable to weather-related outages.
"The U.S. refining system is particularly vulnerable to weather events given the extremely low level of product inventories and the fact that the system is still recovering from the string of outages that has been plaguing it since March," they said in a note to clients.
While the hurricane activity is grabbing the headlines, a recovery for global equity markets following last week's cut in the discount rate by the U.S. Federal Reserve is helping shore up support levels for both Brent and WTI.
A sharp slide in equities following recent news of jitters in the credit market has eroded stock markets over the last few weeks but bulls hope the Fed's move will help prevent a global economic slowdown and ensure current demand estimates for oil remain realistic.
Much depends on the action of the funds which were said to have been responsible for much of the selling in oil recently. The latest report from the U.S. government's Commodity Futures Trading Commission showed a further drop in the net long position of large speculators, made up mostly of funds, on Nymex crude.
-By David Elliott, Dow Jones Newswires; (4420) 7842 9411; david.elliott@dowjones.com (END) Dow Jones Newswires