Oil Is Steady After Rising on Gulf of Mexico Hurricane Threat

By Mark Shenk

Aug. 27 (Bloomberg) -- Crude oil was little changed after rising more than $1 a barrel yesterday on forecasts showing that Hurricane Gustav may enter the Gulf of Mexico, home to more than a fifth of U.S. oil production.

Gustav had sustained winds of 75 miles (120 kilometers) an hour, the National Hurricane Center said in an advisory at 5 p.m. Miami time. Russia, the world's second-biggest oil producer, recognized the independence of two breakaway regions in Georgia yesterday, risking a deepening rift with the West.

``Gustav has the potential to be a major hurricane,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``At this time of year hurricanes become a major concern.''

Crude oil for October delivery fell 31 cents to $115.96 a barrel at 8:42 a.m. Sydney time on the New York Mercantile Exchange. Prices are up 61 percent from a year ago. Futures have dropped 21 percent since touching $147.27 barrel 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.

Gasoline for September delivery rose 0.13 cent to $2.9710 a gallon in New York. Yesterday, it climbed 8.74 cents, or 3 percent, to settle at $2.9697 a gallon.

Pump prices haven't increased since July 19, according to AAA, the nation's largest motorist organization. Regular gasoline, averaged nationwide, fell 0.9 cent to $3.672 a gallon, AAA said yesterday on its Web site. Prices reached a record $4.114 a gallon on July 17.

Strengthening Hurricane

``Prices surged because Gustav appears to be strengthening as it moves toward the Gulf,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. Gustav weakened after reaching Haiti and is forecast to reintensify. ``The news from Georgia is also helping send prices higher. Tension is ratcheting up instead of cooling down.''

Gustav was about 60 miles (95 kilometers) west-southwest of the Haitian capital, Port-au-Prince, and was heading northwest at about 10 mph. Forecasts from the Hurricane Center show Gustav approaching eastern Cuba today. The hurricane will probably move along the southern coast of Cuba and then between the island and the Yucatan Peninsula in Mexico, heading for the Gulf.

Gustav has the potential to grow from Category 1 into a Category 4 hurricane with winds of at least 131 miles per hour by the time it enters the Gulf, said Jim Rouiller, a senior energy meteorologist with Planalytics Inc., a forecaster based in Wayne, Pennsylvania, whose clients include oil companies.

Katrina, Rita

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.

``There's a fear that Gustav might be a replay of Katrina or Rita,'' said Kyle Cooper, an analyst at IAF Advisors in Houston.

German Chancellor Angela Merkel said that Russia's decision to recognize two breakaway Georgian regions of 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.

``It's a very serious situation for Russia,'' said Alexander Rahr, a Russia and Eurasia expert at the German Council on Foreign Relations in Berlin. ``Russia now risks getting itself into complete international isolation.''

Caspian Sea

Oil fell earlier as the dollar strengthened to a six-month high against the euro, limiting the appeal of commodities as a hedge, and shipments of Caspian Sea crude oil resumed after a pipeline fire.

The euro tumbled against the dollar after a report showed German business confidence dropped by more than economists forecast. The European currency declined 0.8 percent to $1.4642 in New York, from $1.4754 Aug. 25. It touched $1.4571, the lowest level since Feb. 14.

``It's a battle between the dollar and the weather for dominance in this market,'' said Tom Bentz, a broker at BNP Paribas in New York. ``The German economic numbers put crude under pressure because it raises concern about lower European demand and sent the dollar to a six-month high. The dollar has been the primary driving force of the oil market for more than six months.''

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 60 cents, or 0.5 percent, to settle at $114.63 a barrel yesterday on London's ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.