Oil refinery damage could be less severe than feared

CRUDE oil prices dropped sharply yesterday, the second straight day of declines, as traders welcomed news that Hurricane Rita had weakened, suggesting that damage to refinery capacity in the Gulf could be less severe than originally feared.

Refineries in the projected path of the hurricane were shuttered, including facilities operated by BP PLC, Royal Dutch Shell PLC and Exxon Mobil Corp. Nineteen of Texas’ 26 refineries, with a combined daily capacity of nearly five million barrels, have been shut, according to the Energy Information Agency.

However, unlike refining facilities shut down by Hurricane Katrina - four of which were still out of service yesterday - traders expected less damage from Rita because the Texas refineries were on higher ground than those in Louisiana.

Light sweet crude for November delivery fell $2.31 to settle at $64.19 a barrel on the New York Mercantile Exchange.

Nymex crude oil prices are more than 40% higher than a year ago, though still below the intraday record of $70.85 set August 30 when Katrina struck Louisiana, damaging numerous refineries and platforms and shutting down production.

The EIA said 2.2 million barrels a day of gasoline production have been shut down ahead of Rita’s landfall, along with 1.2 million barrels per day of distillate production and 666,000 barrels per day of jet fuel production.

However, traders were taking a wait-and-see approach to Rita.

“It’s the calm before the storm,” said Phil Flynn, analyst at Alaron Trading Corp in Chicago.

While forecasters said the storm could slow further by the time it reaches land, analysts also say lesser winds still pose a serious threat to oil rigs and refineries. Worries remain about a direct hit on the Texas coastline, home to more than a quarter of US refining capacity.