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Oil prices fell Thursday, testing a 5-month low, as the market remained focused on slumping demand and the stronger dollar but also watched the threat that Hurricane Ike poses to the Texas Gulf Coast.

Crude futures traded down 94 cents at $101.64 a barrel, having been as low as $100.18 earlier.

On Wednesday, U.S. light sweet crude for October delivery settled down 68 cents to $102.58 a barrel, the lowest closing price since April 1.

Demand: Crude prices have fallen $45 from the record-high of $147.27 a barrel, set July 11, as the weakening global economy crippled demand for pricey energy. “The market has a very weak undertone. It is worried about global demand coupled with ample inventories,” said Andrew Lebow, a broker at MF Global in New York.

oil platform

There is “concern over the near-term economic outlook and the intermediate economic outlook,” said Lebow. “If the economy struggles, obviously, demand for petroleum will be negatively impacted.”

The concern over falling demand is not limited to the U.S. “Traders are worried about falling demand in Europe, South American and even Asia,” said Lebow. “And Asia has really been the engine of any demand growth.” With demand in a free fall, oil producers have decided to curb overproduction.

On Wednesday, the Organization of the Petroleum Exporting Countries announced that it would return to oil production levels from last September, about 28.8 million barrels of oil per day. Given that OPEC member countries have been overproducing, ignoring established quotas, the move by OPEC to adhere to those allotments means a decline of roughly 520,000 barrels of oil per day.

The government’s weekly supply report released Wednesday showed much larger-than-expected declines in both crude and gasoline stockpiles, which would normally push oil prices higher. But the market shrugged the report off to refocus on falling demand.

Tipping point: One analyst said the $45 drop in crude prices, coupled with fresh concerns over the financial sector, could invite investors back into the oil market.

“Demand has continued to fall but the price has continued to fall, too,” said Tom Orr, director of research at Weeden & Co. “You reach some point when that starts to even out.”

Given that oil “has gone from $147 to $102, you may be at a position to get a little bounce back,” said Orr. The $100 mark is a “tipping point” for the psychology of the oil market, he said.

Lehman Brothers (LEH, Fortune 500) reported a third-quarter loss of close to $4 billion and Goldman Sachs (GS,Fortune 500) downgraded the beleaguered stock to “neutral” from “buy.” The bank’s problems added fresh concerns to market’s concerns over the financial sector, and weighed on stocks Thursday.

“Some of the people that piled into the financials are probably getting back out of them and looking at the commodity trade,” said Orr.

Hurricane Ike: Ike was upgraded to a Category 2 storm, according to the National Hurricane Center, and “is forecast to become a major hurricane prior to reaching the coastline,” the Center said. The oil market watches storms in the Gulf closely because production facilities in the region account for about a quarter of U.S. crude oil production.

The Center said that with Ike moving over central and western Gulf of Mexico waters Thursday and Friday, the storm’s center will approach the northwest Gulf of Mexico coast late Friday. Forecasters say the storm is on track to hit the Texas coast, south of Galveston.
 

However, oil prices did not spike as Ike swirled in the Gulf, because Ike was not headed for Gulf production facilities. “We are missing the crude production areas and aiming for Refinery Row along the Texas Gulf Coast,” said Lebow.

Texas is home to 26 refineries, which can process almost 4.8 million barrels of crude per day, or one quarter of the nation’s total refining capacity, according to the Department of Energy. Most of Texas’ refineries are along the Texas Gulf Coast ports - Houston, Port Arthur, and Corpus Christi.

The region was still working to regain production capacity after Hurricane Gustav slammed Louisiana on Labor Day. However, with Ike now approaching with increasing intensity, oil and natural gas producers in the Gulf of Mexico have stopped sending workers back to the platforms, according to the Minerals Management Service (MMS).

The government agency, which tracks offshore operations, estimated that 452 of the 717 manned production platforms - about 63% - remained evacuated in the wake of Gustav. About 95.9% of oil production in the region had been shut down, according to MMS on Wednesday, citing energy company reports.

“It does not appear that (Ike) will be particularly damaging to production facilities,” said Orr. “Unless you get really a direct center hit, there isn’t much meaningful damage. There may be some supply disruption.”

Special trading session: In anticipation that Ike will rock the oil futures market, the Chicago Mercantile Exchange announced that it would hold a special, additional electronic trading session.

Globex trading for oil will begin on Sunday at 10 a.m. ET with a 9:30 a.m. pre-open. Typically, electronic trading on Sunday begins at 6 p.m. in time for early trading in Asia.

Retail gas prices: Even as crude oil prices ticked lower, gas prices at the pump increased for the second consecutive day, according to the Web site for motor advocacy group AAA. In some states where gas supplies depend on Gulf coast crude supplies, gas prices increased by more than they did nationwide.

The average price of regular unleaded gasoline increased 0.3 cent to $3.671 a gallon on a national level. In Texas, the projected landfall for Ike, gas prices jumped 0.5 cent to $3.537 a gallon. In Alabama, gas prices jumped 0.7 cent to $3.628 a gallon. In Arkansas, gas jumped 0.5 cent to $3.577 a gallon.

Robert Calmus from Marathon Oil (MRO, Fortune 500) said several of its Midwest refineries, which process crude oil into gas, were working on partial capacity because Gulf Coast crude delivery has not recovered to pre-Gustav levels.

Gas prices could continue to increase as Ike threatens Gulf crude delivery, according to Tom Kloza from Oil Price Information Service.