Energy Futures Fall Again

Gasoline now sits 36% below is all-time high.
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Updated from 1:31 p.m. EDT

Crude futures fell to a three-week low Monday on growing concern that Hurricane Katrina's negative economic impact could dampen fuel demand in the U.S.

The contract, which has fallen in four of the previous five sessions and lost 5% last week, closed down another 74 cents to $63.34 a barrel on Nymex. Gasoline futures dropped 9 cents to $1.87 a gallon, leaving them 36% below the all-time high of $2.92 a gallon reached on Sept. 1.

As Katrina's economic and human toll continues to climb, many economists have begun shaving their estimates of economic growth in the U.S. this year. Generally, the reductions have been about half a percentage point, reflecting the ripple effect of the storm's impact.

"There will be a reduction in economic activity in the second half of this year, in part because of high energy prices," says Thorsten Fischer, senior economist at Economy.com. "We were more optimistic for this year prior to Katrina."

Fischer said growth estimates for 2005 were cut from 3.9% to 3.5%.

For the second half of this year, Economy.com's growth prediction was reduced to 3.4% from 4.1%.

"But we are much more optimistic about the first half of next year, as government aid and insurance money will kick in and give the economy a boost," Fischer said.

Also keeping a lid on oil prices were remarks by the European Central Bank President Jean-Claude Trichet, saying high energy costs will "no doubt" crimp global economic expansion, news wires reported.

Roughly 900,000 barrels a day of petroleum, or about 60% of total output, is still unavailable in the Gulf because of the storm.

Various reports have predicted a slowdown in global fuel consumption. The International Energy Agency said Katrina is likely to reduce gasoline consumption by 200,000 barrels a day in September.

As for refineries, steady progress in restarting many refineries was overshadowed by last week's remarks by Energy Secretary Sam Bodman, who said 5% of refining capacity in the U.S. will remain offline for months.

Valero

(VLO) - Get Report

said its St. Charles, La., refinery is running at 90% capacity. All of its missing employees were located and are safe.

Analysts at Merrill Lynch said refining margins, or the difference between the price of crude oil and the retail price of products, will continue to widen as supply tightens and gasoline inventories continue to shrink.

In a note to investors, analyst Christopher Moore raised his refining margins forecast by $3.62 a barrel to $12.57 a barrel in 2005, and by $1.88 a barrel to $9.62 a barrel next year. The boost reflected "the strength in margins post-Hurricane Katrina and the likely tight inventory environment that we believe will take several months to rectify."

Merrill Lynch also said that while it sees limited share price increases for independent refiners following a 30% run up after Hurricane Katrina,

Sunoco

(SUN) - Get Report

and

Marathon Oil

(MRO) - Get Report

are still attractive because they both "have material exposure to the strength in refining margins but also trade at attractive valuation levels."

The oil service sector took a hit Monday after two major service providers,

Halliburton

(HAL) - Get Report

and

Schlumberger

(SLB) - Get Report

, were cut to market perform from outperform by Wachovia Securities. Both were downgraded based on valuation.

Analyst Brad Handler said in a note that Halliburton and Schlumberger had higher earnings multiples than they ought to.

Baker Hughes

(BHI)

, the third biggest oil service company, was raised to outperform from market perform by Wachovia's Handler, who citing a "very strong" performance and a "willingness to spend capital to build inventory."

The

Philadelphia Oil Service Sector Index

fell 2.5%.

In other company news,

Southwestern Energy

(SWN) - Get Report

said it will sell 7.3 million newly issued common shares to raise money to pay off a maturing bond and fund a capital project. Southwestern shares were up 82 cents, or 1.6%, to $58.27 in premarket trading, but later fell 0.8% along with the energy industry's declines.

The

Amex Oil Index

, which rose more than 12% since Katrina hit two weeks ago, was recently down 2.2%.

Exxon Mobil

(XOM) - Get Report

fell 1%,

Amerada Hess

(AHC) - Get Report

dropped 3.3%, and

ConocoPhillips

(COP) - Get Report

slid 2.3%.