Oil Prices Extend Decline

NEW YORK (CNNMoney.com) -- Oil prices extended their decline Wednesday as the dollar strengthened against major currencies and traders waited for Gustav damage reports.

Crude futures for October delivery were down $1.55 to $108.16 a barrel.

On Tuesday, oil prices fell $5.75 a barrel to settle $109.71, which was the lowest closing price for oil in nearly 5 months, according to the U.S. Energy Information Administration.

Oil prices have fallen sharply from the record high price of $147.27 a barrel, set July 11, as a sagging U.S. economy has cut into energy demand.

Crude oil is traded in dollars around the globe, so a stronger dollar puts downward pressure on the price of oil, said Tom Orr, director of research at Weeden & Co., a financial services firm.

"When we had an incredibly structurally weak dollar, people went to the commodity trade," said Orr, as "a hedge against inflation, as a place to park money."

But now that the dollar has started to recover, investors are looking to other, more profitable places to keep their funds, Orr said.

Because Gustav did not hit with as much force as anticipated, and the damage to oil production facilities appeared to be less than was feared, the oil market returned its focus Tuesday to slumping global demand for energy.

In advance of Monday's storm, oil companies shut down 100% of production facilities in the Gulf, according to a report released Tuesday by the U.S. Department of Energy. In addition, capacity at 23 refineries was either shut down or reduced, 95.4% of natural gas production was stopped, and three oil delivery pipelines were closed.

On Tuesday evening, the Department of Energy decided to loan 250,000 barrels of oil from the Strategic Petroleum Reserve to Citgo's Lake Charles, La., refinery, according to a statement from the government. The reserve is an emergency repository of 700 million barrels of oil that the government controls.

Hurricane Gustav closed Louisiana's Calcasieu channel which disrupted Citgo crude oil supplies, according to the statement.

Production facilities in the Gulf will remain shut until there has been a full inspection of rigs and refineries to determine the level of damage, according to a report by the U.S. Department of Interior's Mineral Management Service agency.

Three other tropical storms - Hanna, Ike and Josephine - have formed in the Atlantic but currently are not expected to track toward the Gulf of Mexico.

Tropical Storm Hanna was near Haiti on Wednesday morning and could become a hurricane by Thursday, according to the most recent public advisory by the National Hurricane Center. The east coast of Florida could start seeing rain from Hanna as early as Friday, according to the advisory.