Storm drives up oil prices
Published Thursday August 28th, 2008
NEW YORK - 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 U.S. 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 US$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 per cent, to $8.467 per 1,000 cubic feet.
Gustav struck Haiti on Tuesday as a hurricane, pummelling the impoverished country with 145 kilometre per hour 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 Labour 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, month-long 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 per cent 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.
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