Oil rises on fears Gustav will hit Gulf

[August 29, 2008]  NEW YORK (AP) -- Oil prices extended their rise Friday on renewed expectations tropical storm Gustav will soon enter the Gulf of Mexico area, home to a quarter of U.S. crude supplies and 40 percent of its refining capacity. Dollar weakness also supported oil prices.

By midday in Europe, light, sweet crude for October delivery was up $1.13 to $116.72 a barrel in electronic trading on the New York Mercantile Exchange.

The contract fell $2.56 to settle at $115.59 a barrel on Thursday, the first time this week it closed lower.

Early Friday, the storm was centered on Jamaica's southwest coast, about 60 miles west of Kingston, Jamaica. Forecasters said it could strengthen into a hurricane before slamming into Grand Cayman on Friday.

"Until this hurricane hits, the trend has to be higher toward the $120 level," said Jonathan Kornafel, Asia director for brokerage Hudson Capital Energy in Singapore. "If this turns out to be a non-event, the market could really come roaring back down."

Traders were also reacting to a report in Britain's Daily Telegraph, citing an unidentified business source, that Russia may cut oil supplies to Germany and Poland as early as this weekend in response to the threat of European Union sanctions over Russia's war with Georgia.

A weaker dollar Friday against other major currencies also helped boost oil prices. Investors tend to buy into commodities as a hedge against inflation and falls in the greenback's exchange rate.

In early European trading, the euro rose to $1.4746 from $1.4702 late Thursday in New York and the dollar fell to 108.84 Japanese yen from 109.56 yen in the previous session.

Meanwhile, as Gustav advanced, oil companies were pulling employees off installations in the Gulf of Mexico area. Royal Dutch Shell PLC has evacuated nearly 400 people and said it would bring in another 270 Thursday.

The company said production will be affected. BP PLC was also removing personnel from the region, while Exxon Mobil said it was bracing its structures for heavy wind and rain.

Transocean Inc., the world's largest offshore drilling contractor, said Thursday it had evacuated about 190 workers from five of its 11 offshore drilling rigs in the Gulf. Transocean has 1,550 workers in the region.

Weather research firm Planalytics predicted as much as 80 percent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.

Forecasters said Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the U.S. Gulf Coast -- anywhere from south Texas to the Florida panhandle.

"It seems there will be at the very least a slight hit to production," Kornafel said. "But everything is up in the air until Monday or Tuesday."

Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to offshore oil and gas installations in the Gulf. In 2005, Katrina and Rita destroyed 109 oil platforms and five drilling rigs.

Some analysts, however, noted that lower appetite for oil products in the United States could well dampen Gustav's effect on the Gulf area's oil output.

"U.S. oil demand is currently 1.6 million barrels a day lower than when Katrina struck," said Olivier Jakob of Petromatrix in Switzerland. "There is today more U.S. refining capacity offline for economic reasons than can be destroyed by Gustav."

In other Nymex trading, heating oil futures rose 2.35 cents to $3.2061 a gallon, while gasoline prices gained 1.26 cents to $3.0340 a gallon. Natural gas for October delivery rose 12 cents to $8.170 per 1,000 cubic feet.

In London, October Brent crude rose $1.08 to $115.25 a barrel on the ICE Futures exchange.

[Associated Press; By PABLO GORONDI]

Associated Press writers Alex Kennedy in Singapore and Howard Campbell in Kingston, Jamaica, contributed to this report.

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