Oil down sharply on Gustav relief

Early checks showed that oil facilities suffered little damage from Gustav

Crude oil prices have fallen sharply, after oil facilities in the Gulf of Mexico were spared by Hurricane Gustav.

US crude fell to a five-month low of $105.46 a barrel before closing down $5.75 at $109.71 while London's Brent crude fell $1.07 to close at $108.34.

While still high in historical terms, crude is now significantly below the record $147 a barrel hit in early July.

Analysts said the fall in global demand for oil caused by economic weakness in the US and Europe was another factor.

The sharp fall in prices initially led to a strong rally on US stock markets although this later petered out.

The Dow Jones opened more than 240 points higher in early exchanges but this enthusiasm quickly petered out, leaving the benchmark index down about 30 points by mid-afternoon.

This reverse came in the wake of less positive economic news, with closely-watched reports indicating that activity in US factories contracted last month while construction spending fell by 0.6%.

The speculators, hedge funds, and other investors are getting out of this market on a major scale Jim Ritterbusch, oil analyst

Figures from the Institute for Supply Management for factory activity were weaker than expected, prompting one economist to say the US was on the "precipice of a recession".

"It tells us that the manufacturing sector remains essentially stalled," Mr Resler added.

Hurricane Gustav weakened as it hit the US Gulf of Mexico coast south-west of New Orleans and was downgraded to a tropical storm after hitting Fourchon, a port in Louisiana.

Initial checks by some US refiners reported no damage from Gustav, which had originally been classed as the biggest threat to the sector since devastation from Hurricane Katrina in 2005.

Falling demand

Fears of lower global demand for oil also pressured crude prices.

Oil traders speculated that slowing global economic growth would dampen demand for crude, even in booming China and India.

"The magnitude of this pullback suggests the market is fully focused on demand destruction," said oil analyst Jim Ritterbusch.

"The speculators, hedge funds, and other investors are getting out of this market on a major scale."

Opec, the association of oil producing countries, holds its regular meeting next week in Vienna, amid speculation some of its members - such as Iran and Venezuela - would like it to tackle falling oil prices.

Opec members produce about 50% of the world's oil supply.