New York's main contract, light sweet crude for delivery in October, dropped by 66 cents to 65.30 dollars per barrel in early deals.

The price of Brent North Sea crude for October delivery lost 55 cents to 64.12 dollars per barrel.

Oil prices are lower on news that "a number of oil facilities were coming back online", Sucden analyst Sam Tilley said.

Three oil refineries on the US Gulf Coast, battered by Katrina on August 29, were restarting operations and another four were expected to do so soon, the Department of Energy said Tuesday.

Offshore oil drilling in the Gulf of Mexico, which normally supplies a quarter of US crude, was improving also, the federal Minerals Management Service said.

"We still expect the market to be supported by continued uncertainty from what the longer term effects of the hurricane may be and whether there will be any more major hurricanes this season," Tilley said.

A day after Katrina struck, New York's main contract hit a record-high 70.85 dollars per barrel, while in London Brent reached an all-time high 68.89 dollars -- leaving prices double the levels in 2003.

Prices have since plunged, owing largely to the United States and its industrial partners agreeing to tap emergency reserves.

The International Energy Agency (IEA) had said last Friday that its members would release 60 million barrels of crude products over an initial period of 30 days.

"The IEA and to a certain extent the US government are taking on OPEC's role of managing the market in this crisis and that's helped to reduce crude prices," Global Insight analyst Simon Wardell said.

The Organisation of Petroleum Exporting Countries is likely to raise its oil production quotas by at least 500,000 barrels per day when it meets later this month in Vienna, a senior Iranian official said Monday.

Javad Yarjani said the quota hike would "probably" be between 500,000 and one million barrels per day at the meeting on September 19-20.

In the long-term, prices will likely stay above 60 dollars because global supplies remain tight and demand, especially for refined products such as heating oil, will pick up when the northern hemisphere's winter season starts in December, dealers said on Wednesday.

"The fact that the world has to dip into its strategic reserves to try to meet demand, particularly in the US, is an indication that the market is tight," said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.

"There is a limit to the reserves... the supply situation is still tight globally," he said.

related report
Inflation Still A Problem Despite Katrina: Fed's Moskow
Washington (AFP) Sep 07, 2005 - Inflation remains a key concern of Federal Reserve policymakers despite the uncertain economic impact of Hurricane Katrina, Chicago Fed president Michael Moskow said Wednesday.

In comments strongly suggesting the central bank would maintain its policy of gradual rate increases, Moskow said it was difficult to gauge the impact of the hurricane on the national economy, even if it was clear the storm was different from other natural disasters.

Moskow, a member of the Federal Open Market Committee, highlighted the risks of inflation present prior to the hurricane and the potential for further inflation as a result of the hit to US energy infrastructure.

Weighing these factors, "I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," he said.

"Even without an increase in inflation expectations, it will take appropriate monetary policy to keep inflation well contained."

Moskow indicated however that there are some concerns about the economic impact of the storm and that "we are going to face a number of judgment calls" on the impact of Hurricane Katrina on the national economy.

While other natural disasters have had mostly regional impacts, he said that "Hurricane Katrina is different. The scale of destruction clearly is larger. Furthermore, the hurricane has damaged portions of our nation's energy and transportation infrastructures."

As for energy costs, he said that despite the spike in prices, "at least for now, markets think that the disruptions to energy markets as a whole will largely be transitory."

Moskow said that prior to Katrina, the main risks to economic growth were surging energy prices, higher core inflation, and the potential for a decline in housing prices.

"In addition to the potential negative effect on growth, rising oil prices, like other unfavorable cost shocks, can also feed through and raise underlying core inflation," he said.

"So there is also a risk on the inflation front, and the risk is higher now than it was a year ago."

Moskow said he and other members want to send a message that they are keeping inflation in check.

"If we indeed start to see a string of higher inflation numbers, people may begin to expect permanently higher inflation," he said.

"Such expectations could become self-fulfilling if they become built into the behavior of households and businesses. And this would have adverse effects on longer term economic performance. If this occurred, the Fed would need to respond accordingly in order to restore price stability."

Moskow played down the risk of a housing bubble about to burst.

He said high prices "highlight the local nature of housing markets. So, unlike many financial markets, there is much less of a tendency for a house price decline in a particular region spilling over to a more general drop in prices at the national level."

"Furthermore, it's not clear what will happen to house prices," he said. "Financial innovations in mortgage markets, which improve the liquidity of housing investments, and lower capital gains taxes have likely increased the value of residential investment relative to other types of investment."

A drop in housing prices is likely to be gradual enough to allow the Fed an appropriate interest-rate response, he said.

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