Crude Oil Rises a Third Day on Storm Threat in Gulf of Mexico

By Christian Schmollinger

Aug. 27 (Bloomberg) -- Crude oil rose for a third day in New York as meteorologists forecast that Tropical Storm Gustav will enter the Gulf of Mexico, home to more than a fifth of U.S. oil production.

Gustav has weakened from a hurricane to tropical storm with sustained winds of 60 miles (95 kilometers) an hour, the National Hurricane Center said in an advisory at 2 a.m. Miami time. It is expected to increase back to a hurricane before reaching the Gulf platforms, said Jim Rouiller, a senior energy meteorologist with Planalytics Inc., a forecaster based in Wayne, Pennsylvania, whose clients include oil companies.

``There is a perception in the market of a real threat,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. ``It's not supposed to make land fall until Monday and what's that going to do is inject a lot of volatility in the market for the next few days.''

Crude oil for October delivery rose as much as 85 cents, or 0.7 percent, to $117.12 a barrel on the New York Mercantile Exchange. It was trading at $116.49 at 2:56 p.m. Singapore time. Prices are up 62 percent from a year ago.

Futures have dropped 21 percent from a record $147.27 barrel reached on July 11, the highest since trading began in 1983. Yesterday, oil rose $1.16, or 1 percent, to settle at $116.27 a barrel.

``Without any solid news on the storm, the top will be $118 to $120, and I don't think we can get below $112 either,'' Kornafel said.

Gustav was about 80 miles (125 kilometers) west of the Haitian capital, Port-au-Prince, and was heading northwest at about 8 miles per hours. Forecasts from the Hurricane Center show Gustav approaching eastern Cuba today and heading into the central Gulf of Mexico by Aug. 31.

Category 4 Hurricane

Gustav has the potential to grow to a Category 4 hurricane with winds of at least 131 miles per hour by the time it enters the Gulf, Planalytics's Rouiller said.

Companies will begin evacuations of their rigs and platforms today ahead of the hurricane. Transocean Inc., the world's largest offshore oil driller, started suspending operations yesterday. Royal Dutch Shell Plc started making arrangements to remove non-essential staff as well.

U.S. crude oil and fuel production plunged and prices rose to records when hurricanes Katrina and Rita shut refineries and platforms as they struck the Gulf of Mexico coast in August and September 2005. Katrina closed 95 percent of offshore output in the region. Almost 19 percent of U.S. refining capacity was idled because of damage and blackouts caused by the hurricanes.

Breakaway Regions

Prices were also supported by Russia's dispute with the U.S. and European Union on Georgia's breakaway regions and the possibility that it could lead to supply disruptions. Russia is the world's second-largest oil producer.

German Chancellor Angela Merkel said that Russia's decision to recognize South Ossetia and Abkhazia breaches international law and will not be accepted by European Union members meeting to discuss the fallout from the war in Georgia.

``Everyone has moved past Georgia and are looking at the bigger picture of the tension between Russia and Nato and that's made it worse,'' said Kornafel.

Two tankers at the Turkish port of Ceyhan are loading crude pumped through the Baku-Tbilisi-Ceyhan pipeline for the first time since the 1 million-barrel-a-day link was shut by a fire on Aug. 5.

Brent crude oil for October settlement rose as much as 87 cents, or 0.8 percent, to $115.50 a barrel on London's ICE Futures Europe exchange. It was at $114.90 a barrel at 2:56 p.m. Singapore time.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.