By Barani Krishnan and Gene Ramos - ANALYSIS

Wed Aug 30, 2006 3:48 PM ET

NEW YORK (Reuters) - A false hurricane alert in the Gulf of Mexico has wiped a huge premium off U.S. oil prices, and $65 a barrel now seems a realistic support level for crude even though the storm season has three months to go.

U.S. crude oil hit a two-month low of $68.65 a barrel on Wednesday after Ernesto, the fifth storm of the 2006 Atlantic hurricane season, missed the Gulf and moved to Florida where it was downgraded to the status of a tropical depression.

Until Monday, crude had been supported at $70 a barrel, partly due to hurricane fears after the destruction wrought last year by Katrina on oil installations in the Gulf.

"I think the long-term fair value for this market is now in the mid 60s," Stephen Schork, publisher of The Schork Report, a widely followed industry newsletter, told Reuters.

"The matrix is certainly bearish. We're certainly looking at a situation where there's going to be a certain amount of demand disruption in the market over the next few months."

With Ernesto out of the way, the market was also under pressure from soaring crude and gasoline stocks as summer -- the season when gasoline is most in demand in the United States -- ends and refineries head into routine maintenance.

The U.S. Energy Information Administration said Wednesday domestic crude inventories rose a for a second straight week, adding 2.4 million barrels to 332.8 million against average forecasts in a Reuters poll for a 1.5 million drawdown.

Gasoline stocks increased for the second time in as many weeks, rising 400,000 barrels to 206.2 million barrels and dashing expectations for a drop of 700,000 barrels.

While such bearish data could prompt some to peg support for crude at below $65 a barrel in coming months, many were limiting the downside and saying the hurricane season was not officially over until November 30.

"My estimate is around $66 a barrel," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. "That's a downside support possibility until another month or so, until the latter stages of the hurricane season."

He said the market should rebound after that as demand shifts from gasoline to the heating oil required for winter.

Schork said the advance warning system for hurricanes was far from perfect, but it was an alert one could not ignore.

"According to the National Hurricane Center's official track, Ernesto is probably raining on some alligators in the Everglades National Park right about now," he wrote. "The system, as far as oil/gas markets are concerned, is a bust."

But in comments made to Reuters, he said: "It's hard to say. All it takes is one storm for the market to spike."

GOLD SEEN TRACKING OIL

Gold, which often moves in concert with oil, was also down this week although its slide was less pronounced than crude. The spot price of the precious metal was down to a five-week low of $606.80 an ounce in Wednesday's early trade, and by the afternoon in New York it had recovered to trade at

$617.30/$618.80.

The U.S. economy and interest rates would be other factors deciding oil and gold prices, said analysts, adding as many economists were predicting a sharp slowdown in the economy as were anticipating a soft landing.

"I believe oil prices will continue to moderate, housing values may fall a bit, but we won't have a catastrophe," said Peter Morici, economics professor at the University of Maryland School of Business.

The U.S. economy grew at a 2.9 percent annual pace in the second quarter, faster than the 2.5 percent rate initially reported but below the 3.0 percent analysts expected. Some economists expect a growth of 2 percent by the fourth quarter.

Morici disagreed.

"The economy will grow in the range of 3 percent, if the Fed does not raise interest rates further," he said.