U.S. crude dropped $2.23 to $115.92 barrel at 2:01 p.m. EDT , after falling as low as $114.08 earlier. London Brent crude traded down $1.86 at $114.36 a barrel.
Gustav was forecast to strengthen into a hurricane as it neared the Gulf of Mexico, home to a quarter of U.S. crude oil production and 15 percent of its natural gas output.
The storm, packing winds of 70 mph, was bearing down on Kingston, Jamaica, at midday Thursday.
Energy companies operating in the Gulf began shutting production and evacuating personnel ahead of the storm, the biggest threat to the region's oil infrastructure since hurricanes Katrina and Rita in 2005.
The Louisiana Offshore Oil Port—the nation's only deepwater oil port and a major conduit for U.S. crude imports—expected to stop offloading tankers by this weekend.
The U.S. Department of Energy said Thursday it was ready to tap the nation's Strategic Petroleum Reserve in the event Gustav caused a severe production disruption, echoing earlier comments from the IEA.
"We always stand ready to bring additional relief to the market, if it's necessary," Aad van Bohemen, head of the emergency planning and preparation division at the IEA, told Reuters.
As Gustav churned through the Caribbean, Tropical Storm Hanna formed in the Atlantic Ocean with 40 mph winds and a track that could take it toward the Bahamas and Florida next week, the U.S. National Hurricane Center said.
Hurricanes have become a key focus in the oil market since the 2005 storms temporarily knocked out a quarter of U.S. oil and refined fuel production, sending prices to then-record highs.
Faltering demand in the United States and Europe due to high fuel prices has helped knock oil prices from their all-time peak of $147.27 reached on July 11.
Further price weakness on Thursday came from a report from the U.S. Energy Information Administration showing domestic natural gas storage rose 105 billion cubic feet last week, far larger than the forecast in a Reuters poll for a 84 bcf increase.
"The big natgas storage build is lending a bearish tone to the market, even as everyone is still watching Gustav closely," said Phil Flynn, an analyst at Alaron Trading in Chicago.