Oil prices gave up more than $3 in gains Monday as a strengthening dollar and slumping global demand countered Hurricane Ike's threat to Gulf production.
U.S. crude oil for October delivery settled up 11 cents to $106.34 a barrel, but not before falling from a trading high of $109.89 earlier in the day.
Dollar: The greenback moved higher against the 15-nation euro and the British pound Monday, following the Federal bailout of troubled mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).
Because crude oil is traded in U.S. dollars around the globe, a stronger dollar makes crude oil more expensive.
"Currency rates are everything when trading a global market," said James Cordier, founder of OptionSellers.com.
"The dollar is racing toward $1.40 against the euro," said Cordier, and "if it reaches that level, that would spell $100 crude oil without too much problem. Not today or tomorrow, but in the very near future."
The 15-nation euro fell to $1.4065 on Monday afternoon.
Demand, OPEC: Oil has fallen more than $40 a barrel since hitting a record high price of $147.27 a barrel on July 11 as a struggling U.S. economy pushed strapped consumers and businesses to cut back on their fuel consumption.
The Organization of Petroleum Exporting Countries was set to meet Tuesday in Vienna, Austria, and market watchers wondered whether OPEC will decide to cut production levels because crude prices have fallen so sharply in recent months.
"Some of the OPEC cartel are starting to realize that if they don't get oil prices back down below $100, that may kill the golden goose for the cartel, which is strong oil demand growth," said Phil Flynn, senior market analyst at Alaron Trading in Chicago.
"We have really been focusing a lot more on the weakness of the global economy than the losses of crude production," said Andrew Lebow, a broker at MF Global in New York. "The market is showing its inability to stage any rally."
Hurricane Ike: Oil prices rose earlier in the day on fears that Hurricane Ike's course through the Gulf of Mexico will keep oil production shuttered.
"We have Hurricane Ike now poised to go into the U.S. Gulf and this will delay some of the crude production coming back," after Gustav, said Lebow.
Some companies had been hoping to bring production back up to pre-Gustav levels, but that may not be possible until Ike passes, he added.
Ike, which had been downgraded to a Category 2 hurricane as it passed over Cuba, remained a threat to production, and was on track to enter the Gulf of Mexico by late Tuesday, according to the National Hurricane Center.
The storm threatened offshore oil facilities that had already been shut down in reaction to Hurricane Gustav, which slammed into the Louisiana coast a week ago.
The Gulf region is home to about one quarter of the U.S.'s oil production facilities.
As of Monday, 87.5% of crude oil production and 74.1% of natural gas production in the Gulf of Mexico remained shut down, according to the Department of Energy.
On Monday morning Royal Dutch Shell (RDS) said it was evacuating personnel on off-shore drilling rigs in the Gulf ahead of Ike. A day earlier, the company had evacuated 150 people, leaving 500 people still on the rigs. Shell was already operating with a reduced staff on the rigs due to Hurricane Gustav.
"The market is more worried [about Ike] because the industry still has not totally gotten back online after Hurricane Gustav," said Flynn, who indicated that the combination of two storms back-to-back could potentially suspend oil production for a significant period of time.
However, "if Ike does not do any damage, we could see the same post-storm sell-off" that the market saw after Gustav passed without causing major damage, said Flynn.
On Friday, oil settled at a five-month low, down $1.66 to $106.23. Oil lost a total of $9.23 a barrel the week after Gustav hit. Friday's close was the lowest settlement price since April 3, when crude settled at $103.83 a barrel.
