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Crude Oil Down 3.5 Percent as Rita Fears Ease

Crude oil prices slumped 3.5 percent on Friday as massive Hurricane Rita weakened before landfall on the Gulf Coast, easing fears the second major storm in a month would lead to prolonged energy shortages by damaging refineries and pipelines.

U.S. crude oil futures on the New York Mercantile Exchange (search) fell $2.31 to $64.19 a barrel while prices on London's International Petroleum Exchange dropped $2.16 to $62.44.

Rita, expected to strike the Texas and Louisiana coasts Saturday morning, has already paralyzed a vast swath of U.S. refining and crude production. But dealers anticipated a weakening of the storm could make it easier for the industry to bounce back.

"The thinking is it will be less of a direct hit on Houston and therefore less damaging to energy interests and that was enough for people to take some profits," said Marshall Steeves, analyst at Refco Group in New York.

Nearly 30 percent of U.S. refining capacity was shut down, along with nearly all oil production from the Gulf of Mexico, as companies battened down for Rita's heavy winds, massive waves and flooding.

"The total amount of refinery capacity shut down amounts to nearly 5 million barrels per day," EIA, the Energy Department's (search) analytical arm, said in its latest hurricane update.

But Rita weakened sharply as it approached land, with winds dropping to 125 miles per hour from peaks around 175 mph reached earlier in the week over the warm waters of the gulf. At least one private forecaster said he expected the storm to weaken further before making landfall.

"From what once was a super hurricane, this could turn into one of the biggest duds of all time," said Charlie Notis at Freese-Notis Weather, a private weather forecasting firm based in Iowa. Other forecasters said it could remain near its current strength when it reaches the coast.

BP (BP) said on Friday it was hoping for a quick restart of its Texas City refinery — the third largest in the United States — after Rita passes. Several other refiners have told state regulators they plan restarts early next week.

U.S. crude prices have fallen well below the record near $71 hit in late August in Katrina's wake, pressured by the release of global reserves of emergency crude and a wave of products imports from Europe after Katrina.

The International Energy Agency said it could order another release of emergency crude, gasoline and heating oil reserves to help the hurricane-battered United States.

"We are on alert," IEA chief Claude Mandil told Reuters.

The Paris-based agency, which groups the world's industrialized nations, will meet on Saturday to assess damage wrought by Rita.

The Department of Energy (search) said it was also ready to loan oil from its Strategic Petroleum Reserve (SPR) as it did after Katrina. But its resources to deal with a refined products shortage are limited.

"There isn't a shortage of crude. The problem is gasoline," said oil consultant Geoff Pynne.

Rita led oil companies to shut some 15 refineries on the Gulf Coast, adding to four that remained shut in the wake of Hurricane Katrina which hit in late August.

A United Nationsweather expert said there could be a record number of ferocious storms over the Atlantic this year, fueled by a rise in sea temperatures. Rita is the 17th named storm so far, with two months of the hurricane season to go.

"The last time we had 21 named storms was in 1933," said Nanette Lombarda of the World Meteorological Organization.

More than 99 percent of offshore oil output, or 1.49 million bpd, is out of action in the Gulf of Mexico, the U.S. Minerals Management Service (search) said. More than 72 percent of gas output, or 7.2 billion cubic feet is also down.

Analysts warned that any damage to natural gas facilities could boost prices because reduced supplies would be far more difficult to replace than lost crude and could spur additional demand for heating oil and utility fuel oil.

The threat of supply disruption also hung over Nigeria where armed militants are targeting oil facilities to demand the release from jail of a militia leader.

U.S. oil company Chevron shut a second platform on Friday.

The militants have threatened to blow up pipelines and platforms in the world's eighth biggest crude exporter and a key supplier to the United States.