Oil Rises From Six-Week Low as Storm Heads for Gulf of Mexico

By Alexander Kwiatkowski and Gavin Evans

July 21 (Bloomberg) -- Crude oil rose from a six-week low in New York as a tropical storm headed toward the Gulf of Mexico, home to more than a quarter of U.S. oil production

U.S. forecasters said there is a 29 percent chance Tropical Storm Dolly may strengthen to a hurricane after it enters the Gulf of Mexico. The weather system's projected path will take it across Yucatan peninsula today, close to Mexico's largest oil field, the U.S. National Hurricane center said.

``U.S. refinery operations in the Gulf of Mexico are safe at present, but Mexico's oil operations are at risk,'' said Robert Laughlin, senior broker at MF Global Ltd. in London. ``If the direction was to change, a protective shut in of production facilities across the Gulf of Mexico is likely.''

Crude oil for August delivery rose as much as $2.08, or 1.6 percent, to $130.96 a barrel on the New York Mercantile Exchange. It was at $130.90 at 9:02 a.m. in London.

The contract fell 41 cents, or 0.3 percent, to settle at $128.88 on July 18, the lowest close since June 5. Prices dropped 11 percent last week, the most in more than three years, on signs of slowing global economic growth and faltering U.S. fuel demand.

Iran snubbed Western efforts to get it to suspend nuclear enrichment at talks in Geneva on July 19, setting the stage for new sanctions if the Middle East's second-largest oil producer doesn't respond to an existing proposal within two weeks.

``We did not get what we were looking for,'' European Union foreign policy chief Javier Solana said at a press conference following four hours of talks with Iran's top nuclear negotiator, Saeed Jalili.

`Sticking Point'

The dispute with Iran ``has become a perpetual sticking point in the background of the crude market,'' said Gerard Burg, the energy and minerals economist at National Australia Bank in Melbourne. The dispute is like ``two rams butting up against each other. Neither one really wants to yield,'' he said.

Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, borders the Straits of Hormuz and has in the past threatened to close the waterway carrying about a fifth of the world's oil deliveries.

Brent crude oil for September settlement rose as much as $2.27, or 1.7 percent, to $132.46 a barrel on London's ICE Futures Europe exchange. It was trading at $132.39 a barrel at 9:02 a.m. local time.

Falling Dollar

New York oil prices have gained 36 percent this year as the Iranian dispute added to concerns about supplies from the world's largest producing region. Prices also rose as the falling U.S. dollar, weak global equity markets and supply disruptions in the North Sea and Nigeria encouraged investors to buy the commodity.

The North Atlantic hurricane season runs June through November. September is historically the busiest month for storms and hurricanes.

The northern Gulf of Mexico accounts for about 25 percent of U.S. oil production. Tropical Storm Dolly's projected path over the tip of the Yucatan Peninsula takes it north of Campeche Bay, where Petroleos Mexicanos produces about 1.07 million barrels of oil a day.

Dolly may strengthen again as it crosses the gulf on a path that may take it toward the Mexico-Texas border, hurricane center said. There is a 43 percent chance it will remain a storm, with wind speeds between 39 and 73 miles an hour and a 12 percent chance it will dissipate before making land a second time around July 24.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.netGavin Evans in Wellington at gavinevans@bloomberg.net