Oil prices fall ahead of OPEC

Oil prices fell Tuesday as market watchers waited for OPEC leaders in Vienna to formally announce whether the organization will change production level requirements.

Also pushing oil prices lower: Hurricane Ike was downgraded to a Category 1 storm and fear eased that it would cause major damage to Gulf of Mexico oil production facilities.

Oil slid $2.37 to $103.97 a barrel.

On Monday, U.S. crude oil for October delivery settled up 11 cents to $106.34 a barrel, but not before falling from a trading high of $109.89 earlier in the day. A dollar rally on Monday moved oil prices back more than $3 off early session highs.

Waiting for OPEC: Slumping demand for expensive energy has caused the price of crude to fall off sharply from the record high price of $147.27 a barrel, set on July 11.

The drop of more than $40 in oil prices has market watchers paying close attention to the Organization of Petroleum Exporting Countries meeting happening on Tuesday in Vienna, Austria. Market watchers were listening for any production level cuts.

The oil minister of Saudi Arabia, Ali Naimi, indicated that he does not think the production levels need to be changed, according to reports from the Associated Press.

"The market is fairly well balanced," Naimi told the AP on Tuesday. "I think things are in balance, in a healthy position." Because Saudi Arabia is a heavyweight in the cartel, Naimi's comments were closely watched.

OPEC leaders ought to leave production levels set because if the cartel were to cut production levels in order to prop up oil prices, many counties would be angry, according to Phil Flynn, senior market analyst at Alaron Trading.

"If they cut production to try to shore up prices, that would be viewed very unfavorably by the markets that are struggling," said Flynn.

"I don't think OPEC wants to be viewed as muddying up the waters here so they will be forced to do nothing," he said. "My general sense right now is that OPEC is more concerned about demand destruction than about the price drop."

Another analyst said that while it looks that OPEC will not officially cut production, it may try to adhere to quotas more strictly.

"They are probably 700,000 - 800,000 barrels each day over their quotas," said Andrew Lebow, a broker at MF Global in New York. "The chat is that they might adhere more to the quotas."

"As usual, the Saudis are the key," said Lebow. When it comes to the "increase over the quotas, they are the ones that have the lion share."

Hurricane Ike: While Ike killed 73 people when it passed over Haiti, the storm slowed over Cuba, and was downgraded to a Category 1 hurricane, according to the National Hurricane Center.

"There is a sense that the storm might not be as bad as originally feared, and that is good news for the market, but it is also bearish news," said Flynn.

If supply is not impacted, then prices move lower, as the market focuses on sagging demand.

It seems that Ike "is going to miss most of the U.S. crude production and natural gas production areas, and track more toward Southern Texas and the Yucatan peninsula in Mexico," said Lebow. But the oil market will continue to monitor Ike, because the track can change.

The storm was expected to reach the southeastern Gulf of Mexico as early as Tuesday afternoon. "Some weakening is likely as Ike crosses Western Cuba," the Hurricane Center's public advisory said. "But restrengthening is expected once Ike moves into the Gulf of Mexico."

Gustav: Ike threatened oil production rigs and refineries in the Gulf region more than a week after Hurricane Gustav slammed into the coast of Louisiana. About one quarter of the nation's oil production facilities are located in the Gulf.

As of Tuesday, 79.4% of crude oil production and 64.2% of natural gas production in the Gulf of Mexico remained shut from Gustav, according to the Department of Energy.

Gustav damaged two offshore drilling rigs owned by Transocean (RIG) in the Gulf of Mexico, according to Guy Cantwell, a spokesman for the company. Gustav also damaged the mooring system on a third rig, the company said Monday.

Shell has decided to wait until after Ike to return completely into the Gulf.

"Remaining production recovery from Gustav will be delayed until after we can redeploy after Hurricane Ike has safely passed," according to a written statement on Shell's Web site.

Currently, Shell has 240 personnel working on offshore facilities, but plans to "evacuate most or all of our Shell operated assets by Wednesday or Thursday."

Fannie, Freddie: The government announced a plan Sunday to bailout the struggling mortgage giants. The twin companies own $5 trillion in home loans and the mortgage meltdown in the U.S. has crippled the two companies in the past year.

The plan gave Wall Street a jolt of confidence on Monday, and set the Dow soaring 290 points. As Wall Street cheered the rescue of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), investors moved assets away from the commodity market, where they had been hiding cash as a hedge against inflation and other economic uncertainties.

"People moved to commodities, and now that Fannie and Freddie have been bailed out, a lot of that play is coming off the table right now," said Flynn.