Oil Rises More Than $2 as Hurricane Threatens Gulf of Mexico

By Mark Shenk

Aug. 26 (Bloomberg) -- Crude oil rose more than $2 a barrel on forecasts showing that Hurricane Gustav may enter the Gulf of Mexico, home to more than a fifth of U.S. oil production.

Gustav's sustained winds rose to 90 miles (145 kilometers) per hour, the U.S. National Hurricane Center said in an advisory at 8 a.m. Miami time. Russia, the world's second-biggest oil producer, recognized the independence of two breakaway regions in Georgia today, risking a deepening rift with the West.

``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. ``The news from Georgia is also helping send prices higher. Tension is ratcheting up instead of cooling down.''

Crude oil for October delivery rose $2.27, or 2 percent, to $117.38 a barrel at 9:45 a.m. on the New York Mercantile Exchange. Prices are up 63 percent from a year ago.

Brent crude oil for October settlement rose $2.02, or 1.8 percent, to $116.05 a barrel on London's ICE Futures Europe exchange.

The hurricane, located 75 miles south-southeast of the Haitian capital, Port-au-Prince, was heading northwest at 9 mph. Forecasts from the Hurricane Center show Gustav striking Haiti later today. By Aug. 31 the hurricane will probably be between Cuba and the Yucatan Peninsula in Mexico, heading for the Gulf.

``We are going to pay close attention to every change in the storm's forecast,'' said Tom Bentz, a broker at BNP Paribas in New York.

Strengthening Hurricane

Gustav will probably intensify into a Category 2 hurricane later today with winds of at least 96 mph and may develop into a Category 3 or 4 storm by the end of the week, said Eric Wilhelm, senior meteorologist at private forecaster AccuWeather Inc. in State College, Pennsylvania. Hurricanes are rated on the 5-step Saffir-Simpson scale.

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.

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.''

Euro Weakens

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 in August by more than economists forecast. The European currency declined 0.7 percent to $1.465 in New York, from $1.4754 yesterday. 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,'' Bentz said. ``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.

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