Page last updated at 23:23 GMT, Wednesday, 3 September 2008 00:23 UK

Crude oil price drops below $109

Oil traders
Oil traders face a volatile market and difficult economic conditions

Oil prices have dipped below $108 after Hurricane Gustav did not significantly disrupt output, and on concerns that slowing world growth will dent demand.

New York crude fell as much as $2.39 to $107.32 before recovering to settle at $109.35 while Brent crude settled down 28 cents at $108.06.

Prices have fallen from their record of more than $147 a barrel amid evidence of a looming recession in the US.

At the same time, a number of political and currency risks have also subsided.

"Had it not been for the hurricane, we would have seen a lower price profile over the last week," said David Moore of Commonwealth Bank of Australia.

Oil prices have dropped more than $6 a barrel since Friday, and touched their lowest level in five months on Wednesday.

'Demand destruction'

As the threat of Hurricane Gustav has diminished, many of the investors who have been pushing the price of oil higher have now focused on the global economic environment.

"As the reality of this storm is now becoming clear, energy bulls are on the run and the market is finally facing up to the realities surrounding it," said Phil Flynn of Alaron Trading.

On Tuesday, the Organisation for Economic Cooperation and Development warned that the UK was heading for a recession this year.

Closed pumps at a New Orleans gas station
The high price of oil has pushed up the cost of petrol

In the US, concerns still remain that the world's largest economy oil consumer, is facing rocky times.

With economic growth slowing, and many people worried about their job prospects, there is a good chance that consumer spending will slow, limiting demand for crude oil.

"It's the economy, economy, economy. Everyone's worried about demand destruction," said Robert Nunan of Mitsubishi Corp.

On Tuesday, the US said it was releasing 250,000 barrels from its emergency supplies in an attempt to ease market concerns and provide liquidity to the market.

"The release of the oil will prevent any shortage and that will, of course, help calm the market," said Victor Shum of Purvin & Gertz.

Another factor helping push down the price of crude was a gain in the value of the US dollar, which rose to an 11-month high against a basket of major currencies on Wednesday.

The weakness of the dollar has been a main driver of high oil prices as investors looked to offset a drop in the US currency by buying other assets such as crude.

Volatile times

However, while the price of oil may be falling, analysts are keen to point out that markets remain volatile.

Earlier this year a number of well respected Wall Street firms and analysts predicted that oil could climb as high as $250 a barrel.

In the meantime, however, the drop in oil prices will bring some relief to consumers and governments who have been faced with accelerating price growth and more expensive fuel.


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