Oil prices rise as Hurricane Gustav nears Gulf

NEW YORK: Oil prices swung higher Tuesday as Hurricane Gustav struck Haiti, raising concerns that the storm could slam into major oil operations in the Gulf of Mexico.

However, the price rise was tempered by a stronger dollar and a report from the Energy Department showing even slower fuel demand than many traders thought. After dropping as low as $112.36 per barrel in overnight trading, light, sweet crude for October delivery ended the day up $1.16 to settle at $116.27 a barrel on the New York Mercantile Exchange.

If Gustav continues along a path toward the Gulf, it could mean an uptick in gas station prices ahead of Labor Day weekend.

James Cordier, president of Tampa, Fla-based trading firms Liberty Trading Group and OptionSellers.com, said he expects pump prices to edge up about 10 cents between now and Labor Day as refiners add a hurricane premium to wholesale prices. ``Everything about this looks like a strong storm that would evacuate platforms,'' Cordier said.

The average US retail price for gasoline on Tuesday was $3.672, according to auto club AAA, Oil Price Information Service and Wright Express. That is down about a penny from Monday, and down nearly 11 per cent from the record $4.114 reached July 17 - just a few days after crude hit an all-time high above $147 a barrel.

Tropical Storm Gustav became a Category 1 hurricane early Tuesday as it approached Haiti's southern coast, then slammed into the island nation later in the day. The Miami-based National Hurricane Center said Gustav could gather strength over the Gulf's warmer-than-usual waters.

Another weather forecaster, Accuweather.com, said that if Gustav passes through the Yucatan Channel into the Gulf, the storm could intensify into a Category 4 or 5 hurricane. A Category 5 hurricane is defined as having sustained winds over 155 miles per hour; hurricanes Rita and Katrina were Category 5 hurricanes, and shuttered most of the Gulf region's crude oil and natural gas production in the late summer and early fall of 2005.

The Gulf of Mexico's offshore crude production accounts for about a quarter of total US crude production, according to the Energy Department's Energy Information Administration. The region also produces a substantial portion of the nation's natural gas.

In Nymex trading, natural gas futures jumped 45.3 cents to settle at $8.278 per 1,000 cubic feet. Heating oil futures rose 5.85 cents to settle at $3.2099 a gallon, while gasoline prices gained 8.74 cents to settle at $2.9697 a gallon.
Brent crude on London's ICE futures exchange rose 60 cents to settle at $114.63 a barrel.

Analysts and traders also questioned whether rising tensions with the West over the breakaway Georgian territories of Abkhazia and South Ossetia would increase the risk of an interruption of oil and natural gas flows to Europe - which relies heavily on Russian energy supplies.

However, the dollar's advance against the euro, yen and pound had a dampening effect on oil's jump. Many investors buy commodities as a hedge against inflation and weakness in the U.S. currency, so oil prices often fall when the dollar strengthens.

``We think energy prices are absolutely tied to the value of the dollar,'' Cordier said, adding that oil would probably have been up by $3 or $4 on Tuesday if the dollar was unchanged against other major currencies.

Prices also wavered after the EIA released a monthly report showing that year-over-year oil demand was down 5.6 per cent in June, as US drivers pared back their gasoline use.

``That's absolutely huge,'' said Phil Flynn, analyst at Alaron Trading Corp. in Chicago. He said that if a hurricane hits the Gulf, there might be ``an initial surge up in price, but it may affect demand as well.'' After Hurricane Katrina hit in 2005, prices shot up, but demand then tapered off.