Gustav Approaches Gulf of Mexico Oil Prices Rise

As tropical storm Gustav approaches the Gulf of Mexico, the concern about oil supplies drives price of oil upwards: traders also worried that Russia may cut oil supplies to Germany and Poland.

As Gustav roars towards the Gulf of Mexico, home to a quarter of U.S. crude supplies and 40 per cent of its refining capacity, oil prices rose above $116 US a barrel Friday. Light, sweet crude for October delivery rose $1.44 at $117.03 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore. Overnight the contract fell $2.56 US settling at $115.59 a barrel. Earlier this morning the storm was centred on Jamaica's southwest coast, about 140 kilometres west of Kingston after Gustav triggered floods, mudslides and falling trees that killed 59 people in Haiti and eight more in the Dominican Republic. Gustav could strengthen into a hurricane before slamming into Grand Cayman on Friday. "Until this hurricane hits, the trend has to be higher toward the $120 level," said Jonathan Kornafel, Asia director for brokerage Hudson Capital Energy in Singapore. "If this turns out to be a non-event, the market could really come roaring back down." To make matters worse, traders were also reacting to a report in Britain's Daily Telegraph, citing an unidentified business source, that Russia may cut oil supplies to Germany and Poland as early as this weekend in response to the threat of European Union sanctions over Russia's war with Georgia. As Gustav rolls on oil companies were pulling employees off installations in the Gulf of Mexico area. Royal Dutch Shell PLC has evacuated nearly 400 people and said it would bring in another 270 Thursday. Production will be affected. BP PLC was also removing personnel from the region, while Exxon Mobil said it was bracing its structures for heavy wind and rain. Transocean Inc.is the world's largest offshore drilling contractor, and it has evacuated about 190 workers from five of its 11 offshore drilling rigs in the Gulf. Transocean has 1,550 workers in the region. Planalytics, a weather research firm , predicted as much as 80 per cent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm. Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the U.S. Gulf Coast — anywhere from south Texas to the Florida panhandle. "It seems there will be at the very least a slight hit to production," Kornafel said. "But everything is up in the air until Monday or Tuesday." Gustav is the first storm of the 2008 Atlantic hurricane season posing a serious threat to offshore oil and gas installations in the Gulf; in 2005, Katrina and Rita destroyed 109 oil platforms and five drilling rigs.