Oil prices slip on economic uncertainty

Oil prices slipped Thursday as investors weighed supply delays in the Gulf of Mexico against concerns that the U.S. credit crisis will slow global economic growth and hurt crude demand.

Light, sweet crude for November delivery was down 24 cents at $105.49 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract fell 88 cents to settle at $105.73 on Wednesday.

About 66% of oil production and 61% of natural gas output in the Gulf of Mexico remains shut-in after the passage of Hurricanes Gustav and Ike, according to the U.S. Minerals Management Service. The Gulf area is home to a quarter of U.S. oil production and 40% of refining capacity.

Mexico's state oil company said Tuesday it temporarily reduced oil production because U.S. refineries damaged by Ike have canceled shipment orders.

Petroleos Mexicanos, or Pemex, lowered its daily output by 250,000 barrels a day. The company said it expects production to be back to normal by the end of the week. Pemex produced an average of 2.75 million barrels a day in August, the latest available output figure.

OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil operations have added to the supply shortage.

In addition, Royal Dutch Shell PLC was forced to close one of its gasoline-making units at Pernis, Europe's largest oil refinery, on Wednesday night after a mechanical fault. The closed unit has a daily processing capacity representing 10 % of the total 400,000 barrel daily capacity of the refinery, which is located in the Netherlands.

"We don't know when it will reopen," said spokesman Wim van de Wiel.

Crisis may impact crude demand
Traders are also concerned about the turmoil in the U.S. financial system will impact economic growth and crude demand from the world's biggest economy.

President Bush strongly urged Congress to act quickly to pass a $700 billion financial industry bailout, warning Americans in Wednesday speech that failing to act fast risked dire economic consequences such as disappearing retirement savings, rising foreclosures, lost jobs and closed businesses.

"Markets hate uncertainty, and this thing is hanging over everybody's head," said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney. "I don't think anyone is too keen to take a position in oil either way right now."

With the administration's original proposal facing significant changes in Congress, top House leaders issued an upbeat statement late Wednesday saying there was progress toward revised legislation that could pass. Bush summoned presidential candidates Barack Obama, John McCain and legislative leaders to an extraordinary White House summit in hopes of hashing out a deal.

Oil investors are also eyeing the impact the bailout plan may have on the value of the dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation.

The price of oil "depends on the dollar, it has nothing to do with oil demand and supply," Chakib Khelil, the president of the Organization of the Petroleum Exporting Countries, told journalists at a press conference in Algiers on Wednesday.

He said that oil prices would rise if the dollar weakens, as investors would use oil to hedge against the depreciating currency.

The dollar fell slightly in morning trading on Thursday against both the 15-nation euro and the Japanese yen. The euro bought $1.4708, up from $1.4658 late Wednesday in New York. The dollar slipped to 105.89 Japanese yen from 105.93.

In other Nymex trading, heating oil futures for October delivery fell 3.33 cents to $2.9800 a gallon, while gasoline prices rose 0.5 cents to $2.5997 a gallon. Natural gas declined 8.5 cents to $7.594 per 1,000 cubic feet.

In London, November Brent crude fell $1.71 to $100.74 a barrel on the ICE Futures exchange.