Oil prices eased back to around $110 today as the strength of Hurricane Gustav was downgraded, after 96 per cent of offshore oil production in the region was shut down in preparation for the storm.

New York crude fell back to $111 today after gaining $1 in earlier trading to over $116 on expectations Hurricane Gustav would devastate America's Gulf coast.

In London, oil prices fell to $110 when it emerged that Hurricane Gustav had been downgraded from a Category 3 storm to Category 2 on the five-level Saffir-Simpson Hurricane Scale.

The hurricane, due to hit the US coast almost three years to the day after Hurricane Katrina devastated the area, has resulted in workers from over 70 per cent of the platforms and rigs in the Gulf being evacuated, according to the US Minerals Management Service.

At the same time, BHP Billiton, the Anglo-Australian mining giant, has shut down its $1.1 billion Neptune oil project in the Gulf of Mexico, and evacuated staff. Last week, BP also removed a number of “non-essential” workers in the region as the Gustav, then categorised as a storm, gathered pace.

The Gulf area accounts for 26 per cent of US oil production and 14 per cent of its natural-gas output.

The Gulf of Mexico normally produces about 1.3 million barrels of oil and an estimated 7.4 billion cubic feet of gas a day, according to the Minerals Management Service.

Insurers are bracing themselves for claims running into the billions of dollars after Hurricane Gustav hits.

Experts at Risk Management Solutions, the catastrophe risk specialist, predicted last night that insurance losses of between $2 billion and $7 billion were likely, mainly as a result of structural damage to oil platforms and interruptions to supply.

"Losses to the offshore platforms will be extremely sensitive to Gustav's extract track and intensity," said Dr Christine Ziehmann, director of model management at RMS.

"A slight shift to the west than the current projected path would mean Gustav will hit more platforms, and if it strengthens the damage will be greater, so the losses will be in the upper range," she said.

Insured losses of this magnitude would rank Gustav alongside hurricanes Katrina and Rita in terms of the extent of damage caused to individuals and businesses.

RMS said that only a quarter of the planned work on New Orleans' flood defences had been completed, with hurricanes of this intensity usually only occuring once every one hundred years.

"After two relatively quiet seasons for landfalling US hurricanes, we are seeing a return to the frequency of events we would expect in this new period of heightened activity whicy we've been experiencing since 1995.

"Hurricane Hanna is following hot on the heels of Gustav, and we are yet to reach the peak of the season, which occurs around mid-September," Dr Ziehmann said.

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