Crude Prices Head Lower

Gasoline futures also slip as two refineries come back online.
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Updated from 2:57 p.m. EDT

Oil futures fell Tuesday as Gulf Coast energy providers continued to report slow but steady progress in bringing back their storm-damaged infrastructure.

Crude for October delivery closed down $1.61 to $65.96 a barrel, pressured by news that members of the Paris-based International Energy Agency will add 60 million barrels of emergency reserve fuels to world markets over the next month. Gasoline futures fell 13 cents to $2.05 a gallon, but are still about 7% higher than they were before Katrina hit.

Retail gasoline prices averaged $3.05 a gallon countywide last week, the AAA said on its Web site.

According to the government, about 1 million barrels of daily U.S. crude production remains shut in by Hurricane Katrina, while at least six major oil refineries are still closed. It could take weeks to reopen the four hardest-hit facilities, including those owned by

Chevron

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and

ConocoPhillips

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.

"Crude prices have been weighed down due to several factors," said Mike Fitzpatrick, energy analyst at Fimat USA. "The refinery in Pascagoula is still shut down, which means less of a call on crude. The SPR crude release and 30 fuel cargoes on their or way from Europe are also pressuring prices, and it also looks like demand will be tampered down by high costs."

The worst-damaged facilities represent some 5% of U.S. refining capacity.

Marathon Oil

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and

BP

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reportedly restarted two storm-damaged refineries in Louisiana over the weekend. Also

Exxon Mobil's

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500,000-barrels-per-day refinery in Baton Rouge, La. Resumed full operation.

In addition to the IEA pledge, the U.S. Energy Department is expected to start lending and selling about 30 million barrels from the strategic petroleum reserve starting this week.

Reports say about 14 million barrels have already been requested by refiners struggling to restart their plants.

Valero

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, one of the first to ask for government crude, said that it's St. Charles, La., refinery was expected to resume operation sometime this week. Valero is still waiting to hear from nine unaccounted for employees of that facility, a company spokesperson said.

Also worrisome is the natural gas situation. Analysts are expecting natural gas prices, recently at $11.6 per thousand cubic feet, to remain tight, reflecting an ongoing loss of roughly 8 billion cubic feet a day due to supply shut-ins.

In fact, in the six weeks prior to Hurricane Katrina, gas storage fell from a 200 billion-cubic-foot surplus to a 50 billion-cubic-foot deficit, relative to the same time last year, according to a Raymond James report.

"The natural gas market appears set to tighten even further, after already turning a storage surplus into a deficit over the past several weeks. The gas market will likely feel the impacts of the storm for a longer period of time," Raymond James said.

According to various reports, at least three processing plants, which separate gas from liquids and produce roughly 4 billion cubic feet a day, have been shut down. "These are likely to take months rather than weeks to reopen," Ron Denhardt, vice president of natural gas services at Strategic Energy & Economic Research, said.

The status of

Enbridge's

(EEP)

800 million-cubic-feet pipeline remains unknown, though it was probably damaged, Denhardt said.

"We've never been at this price level before, no one really knows how much demand is this going to destroy," Debhardt said. "We are probably going to end up with at least 100 billion cubic feet of lost production by the end of October."

Meanwhile, shares of oil service companies, which soared in the immediate aftermath of Katrina on their repair and inspection capabilities, were down Tuesday.

Cal Dive

(CDIS)

fell 1.5% to $59.01, and

Todco

(THE)

dropped 2% to $33.29.

At Banc of America Securities, analyst Dan Barcelo opined that the integrated oil sector remains "attractively valued," with equities broadly discounting less than $40 a barrel, despite new threats of a supply shock.

"We see the bulk of that upside residing within the majors where we see 8% average upside potential. Among the smaller integrated companies we see 6% upside potential among the US names," Barcelo wrote in a note.

He raised

Amerada Hess

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to a buy based on valuation.