Oil Sinks as Gustav Fears Diminish (Update)

Updated from 10:52 a.m. EDT

Energy futures fell hard and fast at the New York Mercantile Exchange Tuesday after Hurricane Gustav failed to cause much structural damage to offshore oil and gas installations in the Gulf of Mexico.

October West Texas crude settled down $5.75 at $109.71, but traded as low as $105.46 at one point in the day. Brent crude fell $5.71 to close at $108.34 a barrel. The near-month natural gas contract lost 68 cents to close at $7.26 per million British thermal units.

Reformulated gasoline and heating oil both slid 12 cents, settling at $2.85 a gallon and $3.19 a gallon respectively. Near-month natural gas was down 51 cents at $7.44 per million British thermal units.

Speculation that Hurricane Gustav could escalate to a storm the size of Hurricane Katrina had led traders to jack up the price of oil futures in the days prior to Gustav's arrival. That risk premium has been entirely erased by Monday's selloff on the unusually active electronic market and Tuesday's regular Nymex session.

More than 90% of all oil flowing from federal Gulf of Mexico waters was ultimately halted as oil and gas companies shut in offshore rigs and platforms in preparation for the hurricane. It will take at least two or three weeks to get this oil moving again. However, the effect this lull will have on U.S. energy supplies for the intermediate term will be negligible.

Elsewhere, energy stocks were pummeled Tuesday because of free-falling commodity prices. BP (BP Quote) closed 6.3% lower at $54.01, ConocoPhillips (COP Quote) slid 4.3% to $70, Royal Dutch Shell (RDS.B Quote) ended down 4.9% at $66.15, and shares of StatoilHydro (STO Quote), the Norwegian national integrated firm, dropped almost 10% to close at $27.61.