Oil Rises Above $117 on Storm Concerns

Oil prices rose for a third day Wednesday as Tropical Storm Gustav spun toward the Gulf of Mexico on a possible collision course with offshore oil and gas installations.

Also Wednesday, the Energy Department reported a surprise drop in U.S. crude supplies. However, the report did not seem to be affecting trading as oil investors focused their attention on Gustav.

Royal Dutch Shell PLC and BP PLC said they have begun evacuating some workers from offshore rigs scattered throughout the Gulf, home to about a quarter of U.S. crude production and much of its natural gas.

Though it was too soon to know where the storm would hit, some models showed Gustav taking a path toward Louisiana and other Gulf states devastated by Hurricanes Katrina and Rita three years ago in a double blow that sent energy prices soaring.

"A bad storm churning in the Gulf could be a nightmare scenario. We might see oil prices spike $5 to $8 if it really rips into platforms," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Light, sweet crude for October delivery rose as high as $119.63 on the New York Mercantile Exchange before easing back in early afternoon trading to $117.03, still up 76 cents. The contract added $1.16 on Tuesday to settle at $116.27 a barrel.

The storm also boosted natural gas prices, which gained 18.9 cents, or 2.28%, to $8.467 per 1,000 cubic feet.

Gustav struck Haiti on Tuesday as a hurricane, pummeling the impoverished country with 90 mph winds and heavy rain before moving toward Cuba. At least 11 people were killed in Haiti and the Dominican Republic. Gustav was later downgraded to a tropical storm but was expected to regain strength, possibly becoming a dangerous Category 3 storm by next week, forecasters said.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill, said a big threat was to oil refineries dotting the Gulf Coast from Texas to Louisiana. A shutdown in refining there would likely lead to a sudden jump in retail gas prices around Labor Day weekend, a time when many Americans take to the road for end-of-summer vacations.

"There's a strong chance that by Friday we could see some fairly significant pump price increases," Ritterbusch said. "Crude can be replaced and brought in via tanker, but bringing a damaged refinery back up again can take a long time, as we saw with Katrina and Rita."

Prices were also supported by a weaker dollar, which boosted the demand for oil among investors who buy commodities as a hedge against inflation.

The euro recovered ground against the dollar Wednesday after hitting a six-month low the previous day. It bought $1.4714 in New York trading, up from $1.4650 Tuesday.

Crude prices have gone up for three straight days, halting a steep, monthlong slide as oil traders at least temporarily shift back toward a focus on short-term market events like Gustav.

But evidence of falling U.S. oil demand is keeping a lid on oil prices. The U.S. Energy Department's Energy Information Administration said Tuesday that year-over-year oil demand was down 5.6% in June.

"We're getting some pretty powerful data that suggests slower growth and higher gasoline prices have really crimped oil demand in the U.S," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney.

The Energy Department's Energy Information Administration said in its weekly inventory report that crude stockpiles fell slightly by 100,000 barrels to 305.8 million barrels for the week ending Aug. 22.

That compared to the 1.5 million barrel increase analysts surveyed by energy research firm Platts had expected.

"I think Gustav is overshadowing the EIA report. It doesn't appear to having an impact," Flynn said.

The EIA also said gasoline stocks fell less than expected last week, dropping by 1.2 million barrels compared to the 2.8 million barrels expected by analysts.

Supplies of distillates, which includes heating oil and diesel, were flat at 132.1 million barrels.

In other Nymex trading, heating oil futures rose 8.02 cents to $3.2901 a gallon, while gasoline prices gained 9.43 cents to $3.0645 a gallon.

In London, October Brent crude added $1.55 to $116.18 a barrel.