Oil prices drop as US opens reserve taps

Oil prices fell on Wednesday as the US government decided to release crude stocks from its strategic reserve after Hurricane Gustav halted energy production in the Gulf of Mexico.

"The release of the oil will prevent any shortage and that will, of course, help calm the market," said Victor Shum, an analyst with energy consultancy Purvin and Gertz.

Oil prices were also weighed down by a strong dollar, which Wednesday struck an eight-month high against the euro.

A stronger US currency makes oil more expensive for buyers paying in weaker currencies, which in turn reduces demand and leads to lower prices.

New York's main contract, light sweet crude for delivery in October, shed 1.42 dollars to 108.29 dollars a barrel after sliding almost six dollars by the close on Tuesday.
Brent North Sea crude for October was down 1.25 dollars at 107.09 dollars.
Brent had tumbled below 105 dollars at one stage on Tuesday to reach its lowest level in four months after Gustav appeared to have wreaked less damage than feared on Gulf of Mexico US energy facilities.

The United States announced late on Tuesday that it was releasing 250,000 barrels of oil from its strategic reserve to help cover lost production.

There was no oil production on Tuesday in the Gulf of Mexico region, where a quarter of US oil is normally produced, the US Department of the Interior said. Ninety-five percent of natural gas production was also offline.

The threat from Gustav had raised grim memories of the 2005 hurricanes Katrina and Rita which damaged or destroyed about 165 of around 4,000 oil platforms in the Gulf. Damage this time appeared to be much less severe.

A fire meanwhile broke out at Kuwait's largest oil refinery on Wednesday but was quickly brought under control, an oil official said. Kuwait pumps around 2.6 million barrels of oil per day.
Oil prices have eased about 25 percent since reaching record levels above 147 dollars in July, largely because of falling demand as the global economy slows, analysts say.

Elsewhere, the oil market was gearing up for next week's meeting of the Organization of Petroleum Exporting Countries. Some members of the cartel have said that OPEC, which produces 40 percent of world oil, was likely to maintain current output quotas, citing oversupply and falling demand.