Oil prices shot up above $118 a barrel Wednesday, rising for a third day as Tropical Storm Gustav spun toward the Gulf of Mexico on a possible collision course with offshore oil and gas platforms.
Also on Wednesday, the Energy Department reported a surprise drop in U.S. crude supplies. However, the report did not seem to be affecting trading as oil investors focused their attention on Gustav.
Royal Dutch Shell PLC said it has begun evacuating some 300 workers from offshore rigs in the Gulf, home to about a quarter of U.S. crude production and much of its natural gas. Any damage to oil infrastructure or refineries along the coast could send U.S. pump prices spiking.
"A bad storm churning in the Gulf could be a nightmare scenario. We might see oil prices spike $5 to $8 if it really rips into platforms," said Phil Flynn, analyst at Alaron Trading Corporation in Chicago.
Light, sweet crude for October delivery rose $2.34 to $118.61 a barrel in morning trading on the New York Mercantile Exchange, after earlier rising as high as $119.63. The contract added $1.16 on Tuesday to settle at $116.27 a barrel.
Gustav struck Haiti on Tuesday as a hurricane, pummeling the impoverished country with 90 mph winds and heavy rain before moving toward Cuba. At least 11 people were killed in Haiti and the Dominican Republic. Gustav was later downgraded to a tropical storm but was expected to strengthen, possibly becoming a dangerous Category 3 storm by next week.
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill, said a big threat from the storm was to oil refineries scattered along the Gulf Coast from Texas to Louisiana. A shutdown in refining there would likely lead to a sudden jump in retail gas prices around Labor Day weekend, a time when many Americans take to the road of end-of-summer vacations.
"There's a strong chance that by Friday we could see some fairly significant pump price increases," Ritterbusch said. "Crude can be replaced and brought in via tanker, but bringing a damaged refinery back up again can take a long time, as we saw with Katrina and Rita."
Prices were also supported by a weaker dollar, which boosted the demand for oil among investors who buy commodities as a hedge against inflation.
The euro recovered ground against the dollar Wednesday after hitting a six-month low the previous day. It bought $1.4714 in New York trading, up from $1.4650 Tuesday.
But evidence of falling U.S. oil demand is keeping a lid on oil prices. The U.S. Energy Department's Energy Information Administration said Tuesday that year-over-year oil demand was down 5.6 percent in June.
"We're getting some pretty powerful data that suggests slower growth and higher gasoline prices have really crimped oil demand in the U.S," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney.
The Energy Department's Energy Information Administration said in its weekly inventory report that crude stockpiles fell slightly by 100,000 barrels to 305.8 million barrels for the week ending Aug. 22.
That compared to the 1.5 million barrel increase analysts surveyed by energy research firm Platts had expected.
"I think Gustav is overshadowing the EIA report. It doesn't appear to having an impact," Flynn said.
The EIA also said gasoline stocks fell less than expected last week, dropping by 1.2 million barrels compared to the 2.8 million barrels expected by analysts.
Supplies of distillates, which includes heating oil and diesel, were flat at 132.1 million barrels.
In other Nymex trading, heating oil futures rose 9.11 cents to $3.2996 a gallon, while gasoline prices gained 11.09 cents to $3.081 a gallon. Natural gas futures increased 25.1 cents to $8.53 per 1,000 cubic feet.
In London, October Brent crude added $2.04 to $116.67 a barrel.
