Oil prices hit six-month lows near $98 a barrel on Thursday as the dollar rallied and demand for fuel decreased.

Prices had risen earlier as Hurricane Ike headed towards oil installations on the Texas coast forcing nearly 7% of US fuel production to be shut down.

Opec had also reduced output to curb falling prices.

Brent North Sea crude for delivery in October settled at $97.29 a barrel after hitting its lowest level since March at $96.99.

And New York’s benchmark contract, light sweet crude for October, fell $1.71 cents to $100.87 a barrel after dipping as low as $100.10.

Demand focus

The dollar hit a one-year high against the euro and a number of other currencies on Thursday. The euro slid below $1.39 for the first time in a year on heightened concerns about a weak European economy.

The strong greenback makes goods such as oil – which are priced in dollars – more expensive for foreign buyers, dampening demand.

“Crude oil futures slipped further… as the market focused on demand concerns and the strengthening dollar,” said Sucden analyst Michael Davies.

Oil prices reached record levels of above $147 in July, hit by worries that a US-led economic slowdown would curb global demand for energy.

Producer cartel Opec announced a surprise cut in output levels in Vienna on Wednesday, causing prices to rise initially.

But oil fell below $100 a barrel on renewed fears that the deteriorating health of the global economy could dent demand.

The International Energy Agency (IEA) also cut its estimate for global oil demand this year and next.

The IEA said consumers in industrial nations were changing their lifestyles in response to high prices.

Unusual step

The Hurricane season has disrupted energy firms along the Gulf of Mexico – which accounts for a quarter of US oil production and 15% of natural gas production.

The sector is still reeling from the impact of Hurricane Gustav more than a week ago, which shut more than 95% of oil production and more than 73% of natural gas output.

In preparation for Ike, four Gulf coast refineries have shut down operations, accounting for 6.7 percent of the nation’s capacity.

Because of Hurricane Ike’s expected impact on oil and gas supply to the US, the Chicago Mercantile Exchange has announced it will have a special trading session this Sunday – a day it is usually closed.

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Brent crude has fallen below $100 a barrel for the first time since April, as traders predict Opec will stick to current output levels.

With Opec now meeting in Vienna to discuss forthcoming production, Saudi Arabia has already hinted that it sees no need for a cut.

Brent ended Tuesday trading down $4.14 to $99.30 a barrel, while US crude settled down $3.08 to $103.26.

Prices have sunk from a record of more than $147 a barrel seen in July.

Before the meeting, the Venezuelan energy minister said he would support keeping production levels unchanged.

“We need to keep things as they are,” said Rafael Ramirez.

Growing demand

Earlier, the Saudi oil minister Ai al-Nuaimi said: “The market is fairly well balanced.”

“Inventories are in a healthy position, everything is in balance.”

OPEC members including Kuwait and the United Arab Emirates, have called for no change in output levels though Algeria, Iran, Venezuela and Libya have suggested a cut is needed – claiming the market is oversupplied.

Opec is currently thought to be producing about a million barrels per day (bpd) more than its official ceiling of 29.67 million bpd.

In May and June Saudi Arabia agreed to increase production by 500,000 bpd to help calm markets.

Opec produces about 40% of world crude.

In July, the exporters’ group said world demand for oil would grow by 50% between now and 2030 as people in developing countries drive more cars.

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Oil prices have tumbled to seven-week lows amid concerns that the slowing US economy will weaken demand.

US sweet, light crude fell $2.23 to settle at $123.26 a barrel – more than $20 off their peak earlier in July, when prices reached a record $147.27.

Brent crude in London also fell, dropping $1.92 to $124.52.

The oil market has been volatile as traders assess whether there will be enough supply to meet demand, with some predicting further price falls.

Analysts at Lehman Brothers predict oil prices could drop below $100 by the end of the first quarter of 2009.

But others are sceptical.

“Nothing in the fundamental drivers has changed,” said Harry Tchilinguirian, an oil analyst at BNP Paribas.

Volatile market

Since last September, traders have been betting that the need for oil from economies, such as China, would continue to power the demand for oil.

Earlier this month, the International Monetary Fund (IMF) upgraded its economic forecasts for these countries.

At the same time, tensions between politically unstable oil-producing nations and the West sparked fears that supply would be constrained.

The weakening US currency has also encouraged investors to switch into commodities, which have been seen as a more attractive investment as the US economy falters.

A slight rebound in the dollar after a smaller-than-expected decline in new housing sales helped to give oil prices some relief, analysts said.

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Oil prices moved back above $130 a barrel after sliding more than 11% in the past four days, with prices dropping $15 a barrel in that period.

Fears of high prices weakening the US economy had sent oil down to one of the biggest weekly falls since 1983.

On Friday, crude for August delivery rose by up to $2.75, or 2.1%, to $132 in New York. Brent crude for September was up by $2.62, or 2%, at $133.69.

Prices rose after the IMF raised its global economic forecast for 2008.

Other factors have helped to boost prices.

An expansion of an oil workers’ strike in Brazil has not affected production.

And although a pipeline in Nigeria belonging to Italian energy group Eni was blown up, another pipeline belonging to Chevron in the country has been repaired after sabotage in June.

And the US said on Wednesday it was sending an envoy to Geneva to join nuclear talks with Iran for the first time.

Military action against Iran could lead to the closure of the Straits of Hormuz, through which nearly half of the world’s traded oil moves.

Roy Mason, of oil consultancy Oil Movements, estimated on Thursday that Opec oil exports, excluding Angola and Ecuador, would rise by 560,000 barrels per day in the four weeks to the beginning of August.

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The price of crude oil has retreated slightly after hitting record highs above $142 a barrel, amid concerns that supply will not meet demand.

In London, Brent crude was trading at $140.16, having earlier hit $142.13.

New York light crude had climbed as high as $142.26 a barrel, but later fell back to $140.34.

Producers’ group Opec has been under pressure to boost production, though recent reports have shown its members are split over whether to lift output.

Libya has threatened to cut production because the market is well supplied.

Libyan threats

Libya’s most senior oil official, Shokri Ghanem, said on Thursday he was looking into the possibility of cutting production in response to US threats against oil producers.

Analysts blame the price of crude on a variety of factors from basic supply and demand to hedge funds.

Opec has said speculators have played a part in the oil spike this year, but others are not convinced.

“We believe the factors driving oil prices higher are fundamental and not speculative,” Deutsche Bank said in a research note.

“Oil needs to rise to $150 a barrel for oil as a share of global Goss Domestic Produce to reach the levels that occurred in the early 1980s,” according to the bank.

But tensions between oil consumers and producers are rising.

The US House of Representatives has passed a bill that would allow the Justice Department to sue Opec members for limiting supplies.

But the bill has yet to be backed by the Senate and the White House has already said it would veto the bill.

There was also scepticism about whether there will actually be a cut in Libya, because of soaring prices.

“I doubt that any real effort in cutting output would be forthcoming, considering that pricing continues to hit new records,” said Victor Shum, an analyst at Purvin & Getz.

‘Radically new level’

Meanwhile, the chief executive of Gazprom, Alexei Miller, has been talking down the influence of Opec.

Saying that Opec had no real impact on prices, he told the Financial Times: “Not a single decision has been passed of late that would really influence the global oil market.”

He also said that the world was undergoing “a great surge in oil and gas prices, which will end with prices at a radically new level”.

Mr Miller predicted that Gazprom would become the most influential company in the energy business.

On Friday, the firm approved the replacement of former chairman Dmitry Medvedev, who is now Russian president, with former prime minister Viktor Zubkov.

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