Production recovery post-Katrina eases oil to $65 a barrel

Oil prices returned to pre-Katrina levels yesterday as production in the Gulf of Mexico slowly began to recover and the market responded to the release of emergency stocks of oil and petrol.

But analysts warned of a limited lowering of prices, noting that Gulf refineries faced severe damages, supply was tight even before the hurricane and oil demand could be higher than expected next year because the emergency reserves would need to be restocked.

Deborah White, senior oil analyst at Société Générale in Paris, said: "The floor for oil prices has moved up."

Industrial nations plan to release 60 million barrels of oil and oil products during the next 30 days from emergency stocks.

But if the US, European countries, Japan, South Korea and Canada decided to replenish their strategic stocks over the next year, oil demand in 2006 would be about 10 per cent - or 165,000 barrels a day - higher than previously thought.

The market would find it difficult to cope with that extra demand. All producers except Saudi Arabia are already pumping flat-out and planned capacity expansions would merely cover the forecast increase in demand.

Oil prices surged above $70 a barrel last week, and yesterday were trading at about $65. Many analysts see prices remaining above $60 a barrel until the end of the year as the Katrina supply shock adds to the tightness in the market.

Prices at those levels could affect economic growth, particularly in less developed countries. PFC Energy, the Washington-based oil consultants, said: "Higher energy costs and rising interest rates were already exerting a drag on the economy, which has now been amplified by the storm's disruption of oil, gas and transportation activities."

Goldman Sachs cut its forecast for US gross domestic product for the rest of the year by between a half and one percentage point as analysts started to consider Katrina's potential impact on the US economy. Some say high fuel retail prices may begin to alter US consumer behaviour.

Emerging economies in Asia, which use more oil than industrial countries to produce the same goods and services, are among the worst affected. Until now, Asian countries have insulated consumers by heavily subsidising energy costs. But the latest increase in prices is forcing governments to pass on the higher costs.

India, Asia's second largest emerging oil consumer, yesterday warned of an "unavoidable and imminent" increase in retail prices of oil products. Indonesia and the Philippines also warned of price increases.

European benchmark Brent lost $1.26 a barrel, to $64.80 in afternoon trading. Last week, it rose to a nominal all-time high of $68.89. US oil futures did not trade yesterday because of the Labor Day holiday.

The US oil industry is still struggling to recover from Katrina. Only one of the eight closed refineries in Louisiana and Mississippi had restarted. Two of the largest plants have suffered extensive flooding and could be down for months, the government said.

But, with power returning to the region, pipelines were able to increase operating rates. Crude output from the Gulf area, home to a quarter of US domestic production, was running at 21 per cent of its normal rate, up 10 percentage points since Friday. - (Financial Times Service / Reuters)